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Filed Pursuant to Rule 497(c)
Registration No.: 33-62158
PROSPECTUS
JUNE 30, 1998
Morgan Stanley Dean Witter Limited Term Municipal Trust (the "Fund") is a
no-load, open-end diversified management investment company whose investment
objective is to provide a high level of current income that is exempt from
federal income tax, consistent with the preservation of capital and
prescribed standards of quality and maturity. The Fund seeks to achieve its
objective by investing predominately in intermediate term, investment grade
municipal securities with an anticipated average dollar-weighted maturity
range of 7 to 10 years and a maximum average dollar-weighted maturity of 12
years. (See "Investment Objective and Policies".)
Shares of the Fund are sold and redeemed at net asset value without the
imposition of a sales charge. In accordance with a Plan of Distribution
pursuant to Rule 12b-1 under the Investment Company Act of 1940 with Morgan
Stanley Dean Witter Distributors Inc. (the "Distributor"), the Fund
authorizes the Distributor or any of its affiliates, including Morgan Stanley
Dean Witter Advisors Inc., to make payments, out of their own resources, for
specific expenses incurred in promoting the distribution of the Fund's
shares.
This Prospectus sets forth concisely the information you should know
before investing in the Fund. It should be read and retained for future
reference. Additional information about the Fund is contained in the
Statement of Additional Information, dated June 30, 1998, which has been
filed with the Securities and Exchange Commission, and which is available at
no charge upon request of the Fund at the address or telephone numbers listed
on this page. The Statement of Additional Information is incorporated herein
by reference.
MORGAN STANLEY DEAN WITTER
LIMITED TERM MUNICIPAL TRUST
TWO WORLD TRADE CENTER
NEW YORK, NEW YORK 10048
(212) 392-2550 OR
(800) 869-NEWS (TOLL-FREE)
TABLE OF CONTENTS
Prospectus Summary..................................................... 2
Summary of Fund Expenses............................................... 3
Financial Highlights................................................... 4
The Fund and its Management............................................ 5
Investment Objective and Policies...................................... 5
Risk Considerations .................................................. 8
Investment Restrictions................................................ 11
Purchase of Fund Shares................................................ 12
Shareholder Services................................................... 13
Redemptions and Repurchases............................................ 16
Dividends, Distributions and Taxes..................................... 17
Performance Information................................................ 19
Additional Information................................................. 19
Shares of the Fund are not deposits or obligations of, or guaranteed or
endorsed by, any bank, and the shares are not federally insured by the
Federal Deposit Insurance Corporation, the Federal Reserve Board, or any
other agency.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
Morgan Stanley Dean Witter Distributors Inc.,
Distributor
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PROSPECTUS SUMMARY
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<S> <C>
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THE FUND The Fund is organized as a Massachusetts business trust and is a no-load,
open-end, diversified management investment company investing
predominately in intermediate term municipal bonds.
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SHARES OFFERED Shares of beneficial interest with $0.01 par value (see page 19).
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OFFERING PRICE The price of the shares offered by this Prospectus is determined once
daily as of 4:00 p.m., New York time, on each day that the New York
Stock Exchange is open, and is equal to the net asset value per share
without a sales charge (see page 13).
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MINIMUM PURCHASE Minimum initial purchase, $1,000; ($100 if the account is opened through
EasyInvestSM); minimum subsequent investment, $100 (see page 12).
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INVESTMENT The investment objective of the Fund is to provide investors with a
OBJECTIVE high level of current income that is exempt from federal income tax,
consistent with the preservation of capital and prescribed standards
of quality and maturity.
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INVESTMENT POLICIES The Fund will invest at least 75% of its net assets in municipal
securities rated A or better by Moody's Investors Service ("Moody's") or
Standard & Poor's Corporation ("S&P"). The municipal securities in the
Fund's portfolio will have an anticipated average dollar-weighted maturity
range of 7 to 10 years and a maximum average dollar-weighted maturity of
12 years (see page 5).
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INVESTMENT MANAGER Morgan Stanley Dean Witter Advisors Inc., the Investment Manager of
the Fund, and its wholly-owned subsidiary, Morgan Stanley Dean Witter
Services Company Inc., serve in various investment management, advisory,
management and administrative capacities to 101 investment companies
and other portfolios with assets of approximately $114.6 billion at
May 31, 1998 (see page 5).
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MANAGEMENT FEE The Investment Manager receives a monthly fee at the annual rate of
0.50% of the average daily net assets (see page 5).
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DIVIDENDS AND Dividends are declared daily and paid monthly. Capital gains
CAPITAL GAINS distributions, if any, are paid at least once a year or are retained
DISTRIBUTIONS for reinvestment by the Fund. Dividends and distributions are
automatically invested in additional shares at net asset value unless
the shareholder elects to receive cash (see page 17).
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DISTRIBUTOR AND Morgan Stanley Dean Witter Distributors Inc. (the "Distributor") sells
PLAN OF shares of the Fund through Dean Witter Reynolds Inc. ("DWR") and other
DISTRIBUTION selected broker-dealers pursuant to selected broker-dealer agreements.
The Distributor has entered into a Plan of Distribution pursuant to
Rule 12b-1 under the Investment Company Act of 1940, as amended (the
"Act"), with the Fund authorizing the Distributor or any of its affiliates,
including the Investment Manager, to make payments out of their own
resources for expenses incurred in connection with the promotion or
distribution of the Fund's shares (see page 12).
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REDEMPTION Shares are redeemable at net asset value. An account may be involuntarily
redeemed if total value of the account is less than $100 or, if the
account was opened through EasyInvestSM, if after twelve months the
shareholder has invested less than $1,000 in the account (see page 16).
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SHAREHOLDER Automatic Investment of Dividends and Distributions (unless otherwise
SERVICES requested); Investment of Distributions Received in Cash; Exchange
Privilege; Systematic Withdrawal Plan; EasyInvestSM (see page 13).
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RISK CONSIDERATIONS The prices of interest-bearing securities are inversely affected by
changes in interest rates and, therefore, are subject to the risk of
market price fluctuations. The values of fixed-income securities also
may be affected by changes in the credit rating or financial condition
of the issuing entities. Certain of the tax-exempt securities in which
the Fund may invest without limit may subject certain investors to the
federal, and any applicable state, alternative minimum tax (see page 8).
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The above is qualified in its entirety by the detailed information appearing
elsewhere in this Prospectus and in the Statement of Additional Information.
2
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SUMMARY OF FUND EXPENSES
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The following table illustrates all expenses and fees that a shareholder of
the Fund will incur. The expenses and fees set forth in the table are for the
fiscal year ended March 31, 1998.
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<S> <C>
Shareholder Transaction Expenses
Maximum Sales Charge Imposed on Purchases................................. None
Maximum Sales Charge Imposed on Reinvested Dividends...................... None
Deferred Sales Charge..................................................... None
Redemption Fees........................................................... None
Exchange Fee.............................................................. None
Annual Fund Operating Expenses (as a Percentage of Average Net Assets)
Management Fees........................................................... 0.50%
12b-1 Fees................................................................ None
Other Expenses............................................................ 0.33%
Total Fund Operating Expenses............................................. 0.83%
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EXAMPLE 1 YEAR 3 YEARS 5 YEARS 10 YEARS
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You would pay the following expenses on a $1,000 investment,
assuming (1) 5% annual return and (2) redemption at the end
of each time period: $8 $26 $46 $103
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THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES OR PERFORMANCE. ACTUAL EXPENSES OF THE FUND MAY BE MORE OR
LESS THAN THOSE SHOWN.
The purpose of this table is to assist the investor in understanding the
various costs and expenses that an investor in the Fund will bear directly or
indirectly. For a more complete description of these costs and expenses, see
"The Fund and Its Management."
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FINANCIAL HIGHLIGHTS
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The following ratios and per share data for a share of beneficial interest
outstanding throughout each period have been audited by Price Waterhouse LLP,
independent accountants. The financial highlights should be read in
conjunction with the financial statements, the notes thereto and the
unqualified report of independent accountants which are contained in the
Statement of Additional Information. Further information about the
performance of the Fund is contained in the Fund's Annual Report to
Shareholders, which may be obtained without charge upon request from the
Fund.
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<CAPTION>
FOR THE PERIOD
FOR THE YEAR ENDED MARCH 31, JULY 12, 1993*
------------------------------------------------- THROUGH
1998 1997 1996 1995 MARCH 31, 1994
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<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $ 9.91 $ 9.95 $ 9.56 $ 9.61 $10.00
------ ------ ------ ------ ------
Net investment income................. 0.40 0.40 0.41 0.42 0.29
Net realized and unrealized gain
(loss) .............................. 0.35 (0.04) 0.39 (0.05) (0.39)
------ ------ ------ ------ ------
Total from investment operations .... 0.75 0.36 0.80 0.37 (0.10)
Less dividends from net investment
income............................... (0.40) (0.40) (0.41) (0.42) (0.29)
------ ------ ------ ------ ------
Net asset value, end of period ....... $10.26 $ 9.91 $ 9.95 $ 9.56 $ 9.61
====== ====== ====== ====== ======
TOTAL INVESTMENT RETURN+.............. 7.70% 3.65% 8.42% 4.01% (1.11)%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses.............................. 0.83% 0.88%(4) 0.87%(4) 0.76% 0.31%(2)(3)
Net investment income................. 3.92% 3.99% 4.09% 4.41% 3.92%(2)(3)
SUPPLEMENTAL DATA:
Net assets, end of period, in
thousands............................ $57,500 $61,098 $72,766 $85,499 $170,589
Portfolio turnover rate .............. -- -- -- 2% 6%(1)
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* Commencement of operations.
+ Calculated based on the net asset value as of the last business day of
the period.
(1) Not annualized.
(2) Annualized.
(3) If the Fund had borne all of its expenses that were assumed/reimbursed
or waived by the Investment Manager, the annualized expense and net
investment income ratios would have been 0.75% and 3.48%, respectively.
(4) Does not reflect the effect of expense offset of 0.01%.
4
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THE FUND AND ITS MANAGEMENT
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Morgan Stanley Dean Witter Limited Term Municipal Trust (the "Fund")
(formerly named Dean Witter Limited Term Municipal Trust) is a no-load,
open-end, diversified management investment company. The Fund is a trust of
the type commonly known as a "Massachusetts business trust" and was organized
under the laws of The Commonwealth of Massachusetts on February 25, 1993.
Morgan Stanley Dean Witter Advisors Inc. ("MSDW Advisors" or the
"Investment Manager"), whose address is Two World Trade Center, New York, New
York 10048, is the Fund's Investment Manager. The Investment Manager is a
wholly-owned subsidiary of Morgan Stanley Dean Witter & Co., a preeminent
global financial services firm that maintains leading market positions in
each of its three primary businesses--securities, asset management and credit
services. The Investment Manager, which was incorporated in July, 1992 under
the name Dean Witter InterCapital Inc., changed its name to Morgan Stanley
Dean Witter Advisors Inc. on June 22, 1998.
MSDW Advisors and its wholly-owned subsidiary, Morgan Stanley Dean Witter
Services Company Inc., ("MSDW Services"), serve in various investment
management, advisory, management and administrative capacities to a total of
101 investment companies, 28 of which are listed on the New York Stock
Exchange, with combined total assets, including this Fund, of approximately
$110.3 billion as of May 31, 1998. The Investment Manager also manages
portfolios of pensions plans, other institutions and individuals which
aggregated approximately $4.3 billion at such date.
The Fund has retained the Investment Manager, pursuant to an Investment
Management Agreement, to provide administrative services, manage its business
affairs and manage the investment of the Fund's assets, including the placing
of orders for the purchase and sale of portfolio securities. MSDW Advisors
has retained Morgan Stanley Dean Witter Services Company Inc. to perform the
aforementioned administrative services for the Fund. The Fund's Board of
Trustees reviews the various services provided by or under the direction of
the Investment Manager to ensure that the Fund's general investment policies
and programs are being properly carried out and that administrative services
are being provided to the Fund in a satisfactory manner.
As full compensation for the services and facilities furnished to the Fund
and for expenses of the Fund assumed by the Investment Manager, the Fund pays
the Investment Manager monthly compensation calculated daily by applying the
annual rate of 0.50% to the Fund's net assets determined as of the close of
each business day. For the fiscal year ended March 31, 1998, the Fund accrued
total compensation to the Investment Manager amounting to 0.50% of the Fund's
average daily net assets and the Fund's total expenses amounted to 0.83% of
the Fund's average daily net assets.
INVESTMENT OBJECTIVE AND POLICIES
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The investment objective of the Fund is to provide a high level of current
income that is exempt from federal income tax, consistent with the
preservation of capital and prescribed standards of quality and maturity. The
Fund will seek to achieve its investment objective by investing predominately
in intermediate term municipal securities. The investment objective is a
fundamental policy of the Fund and may not be changed without the approval of
the holders of a majority of the Fund's shares. There is no assurance that
the Fund's investment objective will be achieved.
The Fund will invest at least 75% of its net assets in (a) Municipal Bonds
which are rated at the time of purchase within the three highest grades by
Moody's Investors Service, Inc. ("Moody's") or Stan-
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dard & Poor's Corporation ("S&P"); (b) Municipal Notes which at the time of
purchase are rated in the two highest grades by Moody's or S&P, or, if not
rated, have outstanding one or more issues of Municipal Bonds rated as set
forth in clause (a) of this paragraph; and (c) Municipal Commercial Paper
which at the time of purchase are rated P-1 by Moody's or A-1 by S&P. The
Fund may also invest up to 25% of its net assets in municipal securities
rated Baa by Moody's or BBB by S&P, or if not rated, are determined by the
Investment Manager to be the equivalent of Baa/BBB or better. A description
of municipal security ratings is contained in the Appendix to the Statement
of Additional Information.
The municipal securities in the Fund's portfolio will have an anticipated
average dollar-weighted maturity range of 7 to 10 years, with a maximum
average dollar-weighted maturity of 12 years. However, at least 80% of the
net assets of the Fund will be subject to an average dollar-weighted maturity
constraint of 15 years. When computing the average dollar-weighted maturity,
the Fund intends to treat investments which permit the holder to demand
payment of principal at any time or at specified intervals prior to the
stated final maturity as having a maturity equal to the next demand date. The
final maturity of these demand obligations will be no more than 25 years,
until such time as the Staff of the Securities and Exchange Commission has
determined the appropriateness of using maturity shortening techniques for
obligations with longer final maturities.
The foregoing percentage and rating limitations apply at the time of
acquisition of a security based on the last previous determination of the net
asset value of the Fund. Any subsequent change in any rating by a rating
service or change in percentages resulting from market fluctuations or other
changes in total assets of the Fund will not require elimination of any
security from the Fund's portfolio. Therefore, the Fund may hold securities
which have been downgraded from ratings of Baa or BBB or lower by Moody's or
S&P. However such investments may not exceed 5% of the net assets of the
Fund. Any investments which exceed this limitation will be eliminated from
the portfolio within a reasonable period of time (such time as the Investment
Manager determines that it is practicable to sell the investment without
undue market or tax consequences to the Fund). Municipal obligations rated
below investment grade by Moody's or S&P are considered to be speculative
investments, some of which may not be currently paying any interest and may
have extremely poor prospects of ever attaining any real investment standing.
The two principal classifications of municipal obligations and commercial
paper are "general obligation" and "revenue" obligations or commercial paper.
General obligation bonds, notes or commercial paper are secured by the
issuer's pledge of its faith, credit and taxing power for the payment of
principal and interest. Issuers of general obligation bonds, notes or
commercial paper include a state, its counties, cities, towns and other
governmental units. Revenue bonds, notes or commercial paper are payable from
the revenues derived from a particular facility or class of facilities or, in
some cases, from specific revenue sources. Revenue bonds, notes or commercial
paper are issued for a wide variety of purposes, including the financing of
electric, gas, water and sewer systems and other public utilities; industrial
development and pollution control facilities; single and multi-family housing
units; public buildings and facilities; air and marine ports, transportation
facilities such as toll roads, bridges and tunnels; and health and
educational facilities such as hospitals and dormitories. They rely primarily
on user fees to pay debt service, although the principal revenue source is
often supplemented by additional security features which are intended to
enhance the creditworthiness of the issuer's o a governmental unit may be
pledged to the payment of debt service. In other cases, a special tax or
other charge may augment user fees.
When-Issued and Delayed Delivery Securities and Forward Commitments. From
time to time, in the ordinary course of business, the Fund may
6
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purchase securities on a when-issued or delayed delivery basis or may
purchase or sell securities on a forward commitment basis. When such
transactions are negotiated, the price is fixed at the time of the
commitment, but delivery and payment can take place a month or more after the
date of the commitment. There is no overall limit on the percentage of the
Fund's assets which may be committed to the purchase of securities on a
when-issued, delayed delivery or forward commitment basis. An increase in the
percentage of the Fund's assets committed to the purchase of securities on a
when-issued, delayed delivery or forward commitment basis may increase the
volatility of the Fund's net asset value.
When, As and If Issued Securities. The Fund may purchase securities on a
"when, as and if issued" basis under which the issuance of the security
depends upon the occurrence of a subsequent event, such as approval of a
merger, corporate reorganization, leveraged buyout or debt restructuring. If
the anticipated event does not occur and the securities are not issued, the
Fund will have lost an investment opportunity. There is no overall limit on
the percentage of the Fund's assets which may be committed to the purchase of
securities on a "when, as and if issued" basis. An increase in the percentage
of the Fund's assets committed to the purchase of securities on a "when, as
and if issued" basis may increase the volatility of its net asset value.
HEDGING ACTIVITIES
The Fund may enter into financial futures contracts, options on such
futures and municipal bond index futures contracts for hedging purposes.
Financial Futures Contracts and Options on Futures. The Fund may invest in
financial futures contracts and related options thereon. The Fund may sell a
financial futures contract or purchase a put option on such futures contract,
if the Investment Manager anticipates interest rates to rise, as a hedge
against a decrease in the value of the Funds' portfolio securities. If the
Investment Manager anticipates that interest rates will decline, the Fund may
purchase a financial futures contract or a call option thereon to protect
against an increase in the price of the securities that the Fund intends to
purchase. These futures contracts and related options thereon will be used
only as a hedge against anticipated interest rate changes. A futures contract
sale creates an obligation by the Fund, as seller, to deliver the specific
type of instrument called for in the contract at a specified future time for
a specified price. A futures contract purchase would create an obligation by
the Fund, as purchaser, to take delivery of the specific type of financial
instrument at a specified future time at a specified price. The specific
securities delivered or taken, respectively, at settlement date, would not be
determined until or near that date. The determination would be in accordance
with the rules of the exchange on which the futures contract sale or purchase
was effected.
Although the terms of financial futures contracts specify actual delivery
or receipt of securities, in most instances the contracts are closed out
before the settlement date without the making or taking of delivery of the
securities. Closing out of a futures contract is effected by entering into an
offsetting purchase or sale transaction.
Unlike a financial futures contract, which requires the parties to buy and
sell a security on a set date, an option on such a futures contract entitles
its holder to decide on or before a future date whether to enter into such a
contract (a long position in the case of a call option and a short position
in the case of a put option). If the holder decides not to enter into the
contract, the premium paid for the option on the contract is lost. Since the
value of the option is fixed at the point of sale, there are no daily
payments of cash to reflect the change in the value of the underlying
contract as there is by a purchaser or seller of a futures contract. The
value of the option does change and is reflected in the net asset value of
the Fund.
Municipal Bond Index Futures. The Fund may utilize municipal bond index
futures contracts for hedging purposes. The strategies in employing such
contracts will be similar to that discussed above with
7
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respect to financial futures and options thereon. A municipal bond index is a
method of reflecting in a single number the market value of many different
municipal bonds and is designed to be representative of the municipal bond
market generally. The index fluctuates in response to changes in the market
values of the bonds included within the index. Unlike futures contracts on
particular financial instruments, transactions in futures on a municipal bond
index will be settled in cash, if held until the close of trading in the
contract. However, like any other futures contract, a position in the
contract may be closed out by a purchase or sale of an offsetting contract
for the same delivery month prior to expiration of the contract.
The Fund may not enter into futures contracts or related options thereon
if, immediately thereafter, the amount committed to margin plus the amount
paid for option premiums exceeds 5% of the value of the Fund's total assets.
The Fund may not purchase or sell futures contracts or related options, if,
immediately thereafter, more than one-third of the net assets of the Fund
would be hedged.
Options. The Fund may purchase or sell (write) options on debt securities
as a means of achieving additional return or hedging the value of the Fund's
portfolio. The Fund would only buy options listed on national securities
exchanges. The Fund will not purchase options on behalf of the Fund if, as a
result, the aggregate cost of all outstanding options exceeds 10% of the
Fund's total assets.
Lending of Portfolio Securities. The Fund will not lend portfolio
securities if such loans are not permitted by the laws or regulations of any
state in which its shares are qualified for sale and will not lend more than
25% of the value of the total assets of the Fund.
RISK CONSIDERATIONS
Municipal Securities and Ratings. The value of the Fund's portfolio
securities and, therefore, the Fund's net asset value per share, may increase
or decrease due to various factors, principally changes in prevailing
interest rates and the ability of the issuers of the Fund's portfolio
securities to pay interest and principal on such obligations on a timely
basis. Generally, a rise in interest rates will result in a decrease in the
Fund's net asset value per share, while a drop in interest rates will result
in an increase in the Fund's net asset value per share.
Under normal conditions, at least 80% of the total assets of the Fund will
be invested in securities, the interest on which is exempt from federal
income taxes. However, the Fund may invest more than 20% of its total assets
in taxable money market instruments in order to maintain a temporary
"defensive" position, when, in the opinion of the Investment Manager,
prevailing market or financial conditions (including unavailability of
securities of requisite quality) so warrant. Certain of the tax-exempt
securities in which the Fund may invest without limit may subject certain
investors to the federal alternative minimum tax or any applicable state
alternative minimum tax and, therefore, a substantial portion of the income
produced by the Fund may be taxable to such investors under any federal or
any applicable state alternative minimum tax. The Fund, therefore, may not be
a suitable investment for investors who are subject to the alternative
minimum tax. The suitability of the Fund for these investors will depend upon
a comparison of the after-tax yield likely to be provided from the Fund to
comparable tax-exempt investments not subject to such tax and also to
comparable fully taxable investments in light of each investor's tax
position. See "Dividends, Distributions and Taxes."
Investments in municipal bonds rated either Baa by Moody's or BBB by S&P
(investment grade bonds--the lowest rated permissible investments by the
Fund) have speculative characteristics and, therefore, changes in economic
conditions or other circumstances are more likely to weaken their capacity to
make principal and interest payments than would be the case with investments
in securities with higher credit ratings.
The ratings assigned by Moody's and S&P represent their opinions as to the
quality of the securities which they undertake to rate (see the
8
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Appendix to the Statement of Additional Information). It should be
emphasized, however, that the ratings are general and not absolute standards
of quality.
Lease Obligations. Included within the revenue bonds category, as noted
above, are participations in lease obligations or installment purchase
contracts (hereinafter collectively called "lease obligations") of
municipalities. State and local governments, agencies or authorities issue
lease obligations to acquire equipment and facilities. Lease obligations may
have risks not normally associated with general obligation or other revenue
bonds. Leases, and installment purchase or conditional sale contracts (which
may provide for title to the leased asset to pass eventually to the issuer),
have developed as a means for governmental issuers to acquire property and
equipment without the necessity of complying with the constitutional and
statutory requirements generally applicable for the issuance of debt. Certain
lease obligations contain "non-appropriation" clauses that provide that the
governmental issuer has no obligation to make future payments under the lease
or contract unless money is appropriated for such purpose by the appropriate
legislative body on an annual or other periodic basis. Consequently,
continued lease payments on those lease obligations containing
"non-appropriation" clauses are dependent on future legislative actions. If
such legislative actions do not occur, the holders of the lease obligation
may experience difficulty in exercising their rights, including disposition
of the property.
In addition, lease obligations represent a relatively new type of
financing that has not yet developed the depth of marketability associated
with more conventional municipal obligations, and, as a result, certain of
such lease obligations may be considered illiquid securities. To determine
whether or not the Fund will consider such securities to be illiquid (the
Fund may not invest more than fifteen percent of its net assets in illiquid
securities), the Trustees of the Fund have established guidelines to be
utilized by the Fund in determining the liquidity of a lease obligation. The
factors to be considered in making the determination include: 1) the
frequency of trades and quoted prices for the obligation; 2) the number of
dealers willing to purchase or sell the security and the number of other
potential purchasers; 3) the willingness of dealers to undertake to make a
market in the security; and 4) the nature of the marketplace trades,
including the time needed to dispose of the security, the method of
soliciting offers, and the mechanics of the transfer.
Futures Contracts and Options on Futures. A risk in employing futures
contracts to protect against the price volatility of portfolio securities is
that the prices of securities subject to such futures contracts may correlate
imperfectly with the behavior of the cash prices of the Fund's portfolio
securities. The risk of imperfect correlation will be increased by the fact
that the financial futures contracts in which the Fund may invest are on
taxable securities rather than tax-exempt securities, and there is no
guarantee that the prices of taxable securities will move in a similar manner
to the prices of tax-exempt securities. The correlation may be distorted by
the fact that the futures market is dominated by short-term traders seeking
to profit from the difference between a contract or security price objective
and their cost of borrowed funds. Such distortions are generally minor and
would diminish as the contract approached maturity.
Another risk is that the Investment Manager could be incorrect in its
expectations as to the direction or extent of various interest rate movements
or the time span within which the movements take place. For example, if the
Fund sold financial futures contracts for the sale of securities in
anticipation of an increase in interest rates, and then interest rates went
down instead, causing bond prices to rise, the Fund would lose money on the
sale.
In addition to the risks that apply to all options transactions (see the
Statement of Additional Information for a description of the characteristics
of, and the risks of investing in, options on debt securities), there are
several special risks relating to options on futures. In particular, the
ability to establish and
9
<PAGE>
close out positions on such options will be subject to the development and
maintenance of a liquid secondary market. It is not certain that this market
will develop or be maintained.
Zero Coupon Securities. A portion of the fixed-income securities purchased
by the Fund may be zero coupon securities. Such securities are purchased at a
discount from their face amount, giving the purchaser the right to receive
their full value at maturity. The interest earned on such securities is,
implicitly, automatically compounded and paid out at maturity. While such
compounding at a constant rate eliminates the risk of receiving lower yields
upon reinvestment of interest if prevailing interest rates decline, the owner
of a zero coupon security will be unable to participate in higher yields upon
reinvestment of interest received on interest-paying securities if prevailing
interest rates rise.
A zero coupon security pays no interest to its holder during its life.
Therefore, to the extent the Fund invests in zero coupon securities, it will
not receive current cash available for distribution to shareholders. In
addition, zero coupon securities are subject to substantially greater price
fluctuations during periods of changing prevailing interest rates than are
comparable securities which pay interest on a current basis. Current federal
tax law requires that a holder (such as the Fund) of a zero coupon security
accrue a portion of the discount at which the security was purchased as
income each year even though the Fund receives no interest payments in cash
on the security during the year.
Year 2000. The investment management services provided to the Fund by the
Investment Manager and the services provided to shareholders by the
Distributor and the Transfer Agent depend on the smooth functioning of their
computer systems. Many computer software systems in use today cannot
recognize the year 2000, but revert to 1900 or some other date, due to the
manner in which dates were encoded and calculated. That failure could have a
negative impact on the handling of securities trades, pricing and account
services. The Investment Manager, the Distributor and the Transfer Agent have
been actively working on necessary changes to their own computer systems to
prepare for the year 2000 and expect that their systems will be adapted
before that date, but there can be no assurance that they will be successful,
or that interaction with other non-complying computer systems will not impair
their services at that time.
In addition, it is possible that the markets for securities in which the
Fund invests may be detrimentally affected by computer failures throughout
the financial services industry beginning January 1, 2000. Improperly
functioning trading systems may result in settlement problems and liquidity
issues. In addition, corporate and governmental data processing errors may
result in production problems for individual companies and overall economic
uncertainties. Earnings of individual issuers will be affected by remediation
costs, which may be substantial. Accordingly, the Fund's investments may be
adversely affected.
For additional risk disclosure, please refer to the "Investment Objective
and Policies" section of the Prospectus and to the "Investment Practices and
Policies" section of the Statement of Additional Information.
PORTFOLIO MANAGEMENT
The Fund's portfolio is actively managed by its Investment Manager with a
view to achieving the Fund's investment objective. The Fund is managed within
MSDW Advisors' Tax-Exempt Group, which manages 39 tax-exempt municipal bond
funds, with approximately $11 billion in assets as of May 31, 1998. Ms.
Katherine H. Stromberg is the Fund's portfolio manager. Ms. Stromberg has
been a municipal bond portfolio manager for more than 15 years and has been a
portfolio manager at MSDW Advisors for over five years. In determining which
securities to purchase for the Fund or hold in the Fund's portfolio, the
Investment Manager will rely on information from various sources, including
research, analysis and appraisals of brokers and dealers, including Dean
Witter Reynolds Inc., Morgan Stanley & Co. Incorporated and other
broker-dealers that are affiliates of the Investment Man-
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ager, the views of others regarding economic developments and interest rate
trends; and the Investment Manager's own analysis of factors it deems
relevant.
Brokerage commissions are not normally charged on the purchase or sale of
municipal obligations, but such transactions may involve costs in the form of
spreads between bid and asked prices. Pursuant to an order of the Securities
and Exchange Commission, the Fund may effect principal transactions in
certain taxable money market instruments with Dean Witter Reynolds Inc. In
addition, the Fund may incur brokerage commissions on futures' and options'
transactions conducted through Dean Witter Reynolds Inc., Morgan Stanley &
Co. Incorporated and other brokers and dealers that are affiliates of the
Investment Manager. It is not anticipated that the portfolio trading engaged
in by the Fund will result in its portfolio turnover rate exceeding 100%.
INVESTMENT RESTRICTIONS
- -----------------------------------------------------------------------------
The investment restrictions listed below are among the restrictions, a
complete listing of which is contained in the Statement of Additional
Information, which have been adopted by the Fund as fundamental policies.
Under the Investment Company Act of 1940, as amended (the "Act"), a
fundamental policy may not be changed without the vote of a majority of the
outstanding voting securities of the Fund, as defined in the Act.
For purposes of the following restrictions: (a) an "issuer" of a security
is the entity whose assets and revenues are committed to the payment of
interest and principal on that particular security, provided that the
guarantee of a security will be considered a separate security and provided
further that a guarantee of a security shall not be deemed to be a security
issued by the guarantor if the value of all securities issued or guaranteed
by the guarantor and owned by the Fund does not exceed 10% of the value of
the total assets of the Fund; (b) a "taxable security" is any security the
interest on which is subject to federal income tax; and (c) all percentage
limitations apply immediately after a purchase or initial investment, and any
subsequent change in any applicable percentage resulting from market
fluctuations does not require elimination of any security from the portfolio.
The Fund may not:
1. With respect to 75% of its total assets, purchase securities of any
issuer if, immedi ately thereafter, more than 5% of the value of its total
assets are in the securities of any one issuer (other than obligations
issued, or guaranteed by, the United States Government, its agencies or
instrumentalities).
2. With respect to 75% of its total assets, purchase more than 10% of all
outstanding taxable debt securities of any one issuer (other than debt
securities issued, or guaranteed as to principal and interest by, the
United States Government, its agencies or instrumentalities).
3. Invest 25% or more of the value of its total assets in securities of
issuers in any one industry (industrial development and pollution control
bonds are grouped into industries based upon the business in which the
issuers of such obligations are engaged). This restriction does not apply
to obligations issued or guaranteed by the United States Government, its
agencies or instrumentalities or to domestic bank obligations.
Notwithstanding any other investment policy or restriction, the Fund may
seek to achieve its investment objective by investing all or substantially
all of its assets in another investment company having substantially the same
investment objective and policies as the Fund.
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PURCHASE OF FUND SHARES
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The Fund offers it shares for sale to the pub lic on a continuous basis at
the offering price with out the imposition of a sales charge. The offering
price will be the net asset value per share next determined following receipt
of an order (see "Determination of Net Asset Value"). Pursuant to a
Distribution Agreement between the Fund and Morgan Stanley Dean Witter
Distributors Inc. ("MSDW Distributors" or the "Distributor"), an affiliate of
the Investment Manager, shares of the Fund are distributed by the Distributor
and are offered by Dean Witter Reynolds Inc. ("DWR"), a selected dealer and
subsidiary of Morgan Stanley Dean Witter & Co., and other broker-dealers
which have entered into selected broker-dealer agreements with the
Distributor ("Selected Broker-Dealers"). It is anticipated that DWR will
undergo a change of corporate name which is expected to incorporate the brand
name of "Morgan Stanley Dean Witter," pending approval of various regulatory
authorities. The principal executive office of the Distributor is located at
Two World Trade Center, New York, New York 10048.
The minimum initial purchase is $1,000 and subsequent purchases of $100 or
more may be made by sending a check, payable to Morgan Stanley Dean Witter
Limited Term Municipal Trust, directly to Morgan Stanley Dean Witter Trust
FSB (the "Transfer Agent" or "MSDW Trust") at P.O. Box 1040, Jersey City, NJ
07303 or by contacting a Morgan Stanley Dean Witter Financial Advisor or
other Selected Broker-Dealer representative. The minimum initial purchase in
the case of investments through EasyInvestSM, an automatic purchase plan (see
"Shareholder Services"), is $100, provided that the schedule of automatic
investments will result in investments totalling at least $1,000 within the
first twelve months. In the case of investments pursuant to Systematic
Payroll Deduction Plans (including Individual Retirement Plans), the Fund, in
its discretion, may accept investments without regard to any minimum amounts
which would otherwise be required if the Fund has reason to believe that
additional investments will increase the investment in all accounts under
such Plans to at least $1,000. Certificates for shares purchased will not be
issued unless a request is made by the shareholder in writing to the Transfer
Agent.
Shares of the Fund are sold through the Distributor or a Selected
Broker-Dealer on a normal three business day settlement basis; that is,
payment is due on the third business day (settlement date) after the order is
placed with the Distributor or Selected Broker-Dealer. Shares of the Fund
purchased through the Distributor are entitled to dividends beginning on the
next business day following settlement date. Since DWR or other Selected
Broker-Dealers forward investors' funds on settlement date, they will benefit
from the temporary use of the funds if payment is made prior thereto. Shares
purchased through the Transfer Agent are entitled to dividends beginning on
the next business day following receipt of an order. As noted above, orders
placed directly with the Transfer Agent must be accompanied by payment.
Investors will be entitled to receive capital gains distributions if their
order is received by the close of business on the day prior to the record
date for such distributions. Investors will be entitled to receive income
dividends if their order is received by the close of business on the day
prior to the record date for such dividends and distributions.
Sales personnel of a Selected Broker-Dealer are compensated for shares of
the Fund sold by them by the Distributor or any of its affiliates and/or by a
Selected Broker-Dealer. In addition, some sales personnel of the Selected
Broker-Dealer will receive non-cash compensation as special sales incentives,
including trips, educational and/or business seminars and merchandise. The
Fund and the Distributor reserve the right to reject any purchase orders.
PLAN OF DISTRIBUTION
The Fund has entered into a Plan of Distribution pursuant to Rule 12b-1
under the Act with the Distributor whereby the Distributor is authorized to
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utilize its own resources or those of its affiliates, including MSDW
Advisors, to finance certain services and activities in connection with the
distribution of the Fund's shares. The principal activities and services
which may be provided by the Distributor, DWR, its affiliates and other
Selected Broker-Dealers under the Plan include: (1) compensation to and
expenses of Morgan Stanley Dean Witter Financial Advisors and other Selected
Broker-Dealer representatives and other employees of the Distributor and
other Selected Broker-Dealers, including overhead and telephone expenses; (2)
sales incentives and bonuses to sales representatives and to marketing
personnel in connection with promoting sales of the Fund's shares; (3)
expenses incurred in connection with promoting sales of the Fund's shares;
(4) preparing and distributing sales literature; and (5) providing
advertising and promotional activities, including direct mail solicitation
and television, radio, newspaper, magazine and other media advertisements.
DETERMINATION OF NET ASSET VALUE
The net asset value per share of the Fund is determined once daily at 4:00
p.m., New York time (or, on days when the New York Stock Exchange closes
prior to 4:00 p.m., at such earlier time), on each day that the New York
Stock Exchange is open by taking the value of all assets of the Fund,
subtracting all of its respective liabilities, dividing by the number of
shares outstanding and adjusting to the nearest cent. The net asset value per
share of the Fund will not be determined on Good Friday and on such other
federal and non-federal holidays as are observed by the New York Stock
Exchange.
Certain of the Fund's portfolio securities (other than short-term taxable
debt securities, futures and options) may be valued by an outside independent
pricing service approved by the Fund's Trustees. The service may utilize a
computerized grid matrix of tax-exempt securities and evaluations by its
staff in determining what it believes is the fair value of the Fund's
portfolio securities. The Board believes that timely and reliable market
quotations are generally not readily available to the Fund for purposes of
valuing tax-exempt securities and that the valuations supplied by the pricing
service are more likely to approximate the fair value of such securities. A
more detailed discussion of valuation procedures is in the Fund's Statement
of Additional Information.
SHAREHOLDER SERVICES
- -----------------------------------------------------------------------------
Automatic Investment of Dividends and Distributions. All income dividends
and capital gains distributions are automatically paid in full and fractional
shares of the Fund (or, if specified by the shareholder, any other open-end
investment company for which MSDW Advisors serves as investment manager
(collectively, with the Fund, the "Morgan Stanley Dean Witter Funds")),
unless the shareholder requests that they be paid in cash. Such dividends and
distributions will be paid, at the net asset value per share, in shares of
the Fund (or in cash if the shareholder so requests) on the monthly payment
date, which will be no later than the last business day of the month for
which the dividend or distribution is payable. Processing of dividend checks
begins immediately following the monthly payment date. Shareholders who have
requested to receive dividends in cash will normally receive their monthly
dividend check during the first ten days of the following month.
EasyInvest (Service Mark). Shareholders may subscribe to EasyInvest, an
automatic purchase plan which provides for any amount from $100 to $5,000 to
be transferred automatically from a checking or savings account, or following
redemption of shares of a Morgan Stanley Dean Witter money market fund, on a
semi-monthly, monthly or quarterly basis, to the Fund's Transfer Agent for
investment in shares of the Fund.
Systematic Withdrawal Plan. A systematic withdrawal plan (the "Withdrawal
Plan") is available for shareholders who own or purchase shares of the Fund
having a minimum value of $10,000 based
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<PAGE>
upon the then current net asset value. The Withdrawal Plan provides for
monthly or quarterly (March, June, September and December) checks in any
dollar amount, not less than $25, or in any whole percentage of the account
balance, on an annualized basis. Withdrawal Plan payments should not be
considered as dividends, yields or income. If periodic withdrawal plan
payments continuously exceed net investment income and net capital gains, the
shareholder's original investment could be correspondingly reduced and
ultimately exhausted.
Each withdrawal constitutes a redemption of shares and any gain or loss
realized must be recognized for federal income, and generally, for state and
local tax purposes.
Shareholders should contact their Morgan Stanley Dean Witter Financial
Advisor or other Selected Broker-Dealer representative or the Transfer Agent
for further information about any of the above services.
Exchange Privilege. An "Exchange Privilege," that is, the privilege of
exchanging shares of certain Morgan Stanley Dean Witter Funds for shares of
the Fund, exists whereby shares of Morgan Stanley Dean Witter Funds that are
multiple class funds ("Morgan Stanley Dean Witter Multi-Class Funds"), shares
of Morgan Stanley Dean Witter Multi-State Municipal Series Trust and Morgan
Stanley Dean Witter Hawaii Municipal Trust, which are Morgan Stanley Dean
Witter Funds sold with a front-end sales charge ("FSC Funds"), and shares of
Morgan Stanley Dean Witter Global Short-Term Income Fund Inc. ("Global
Short-Term"), which is a Morgan Stanley Dean Witter Fund offered with a
contingent deferred sales charge ("CDSC"), may be exchanged for shares of the
Fund, Morgan Stanley Dean Witter Intermediate Term U.S. Treasury Trust,
Morgan Stanley Dean Witter Short-Term U.S. Treasury Trust and Morgan Stanley
Dean Witter Short-Term Bond Fund, and for shares of five Morgan Stanley Dean
Witter Funds which are money market funds: Morgan Stanley Dean Witter Liquid
Asset Fund Inc., Morgan Stanley Dean Witter U.S. Government Money Market
Trust, Morgan Stanley Dean Witter Tax-Free Daily Income Trust, Morgan Stanley
Dean Witter California Tax Free Daily Income Trust and Morgan Stanley Dean
Witter New York Municipal Money Market Trust (which nine funds, including the
Fund, are hereinafter collectively referred to as "Exchange Funds"). Shares
of the Exchange Funds received in an exchange for shares of a Morgan Stanley
Dean Witter Multi-Class Fund may be redeemed and exchanged only for shares of
the corresponding Class of a Morgan Stanley Dean Witter Multi-Class Fund or
for shares of one of the other Exchange Funds, provided that shares of the
Exchange Funds received in an exchange for Class A shares of a Morgan Stanley
Dean Witter Multi-Class Fund may also be redeemed and exchanged for shares of
a FSC Fund, and shares of the Exchange Funds received in an exchange for
Class B shares of a Morgan Stanley Dean Witter Multi-Class Fund may also be
redeemed and exchanged for shares of Global Short-Term. In addition, shares
of the Exchange Funds received in an exchange for shares of a FSC Fund may be
redeemed and exchanged for Class A shares of a Morgan Stanley Dean Witter
Multi-Class Fund or for shares of one of the other Exchange Funds, and shares
of the Exchange Funds received in an exchange for shares of Global Short-Term
may be redeemed and exchanged for Class B shares of a Morgan Stanley Dean
Witter Multi-Class Fund or for shares of one of the other Exchange Funds.
An exchange to an Exchange Fund that is not a money market fund is on the
basis of the next calculated net asset value per share of each fund after the
exchange order is received. When exchanging into a money market fund, shares
of the Multi-Class Fund, the FSC Fund, Global Short-Term or the Exchange Fund
are redeemed at their next calculated net asset value and exchanged for
shares of the money market fund at their net asset value determined the
following business day. Ultimately, any applicable CDSC will have to be paid
upon redemption of shares originally purchased from Global Short-Term or a
Class of a Morgan Stanley Dean Witter Multi-Class Fund that imposes a CDSC.
(If shares of an Exchange Fund received in ex-
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<PAGE>
change for shares originally purchased from Global Short-Term or Class B of a
Morgan Stanley Dean Witter Multi-Class Fund are exchanged for shares of
Global Short-Term or another Morgan Stanley Dean Witter Multi-Class Fund
having a different CDSC schedule than that of Global Short-Term or the Morgan
Stanley Dean Witter Multi-Class Fund from which the Exchange Fund shares were
acquired, the shares will be subject to the higher CDSC schedule.) During the
period of time the shares originally purchased from Global Short-Term or from
a Class of a Morgan Stanley Dean Witter Multi-Class Fund that imposes a CDSC
remain in the Exchange Fund, the holding period (for the purpose of
determining the rate of CDSC) is frozen. If those shares are subsequently
re-exchanged for shares of a Morgan Stanley Dean Witter Multi-Class Fund or
shares of Global Short-Term, the holding period previously frozen when the
first exchange was made resumes on the last day of the month in which shares
of a Morgan Stanley Dean Witter Multi-Class Fund or shares of Global
Short-Term are reacquired. Thus, the CDSC is based upon the time (calculated
as described above) the shareholder was invested in shares of a Morgan
Stanley Dean Witter Multi-Class Fund or in shares of Global Short-Term. In
the case of exchanges of Class A shares of a Morgan Stanley Dean Witter
Multi-Class Fund which are subject to a CDSC, the holding period also
includes the time (calculated as described above) the shareholder was
invested in shares of a FSC Fund. In the case of shares exchanged into an
Exchange Fund on or after April 23, 1990, upon a redemption of shares which
results in a CDSC being imposed, a credit (not to exceed the amount of the
CDSC) will be given in an amount equal to the Exchange Fund 12b-1 fees, if
any, incurred on or after that date which are attributable to those shares
(see "Purchase of Fund Shares--Plan of Distribution" in the respective
Exchange Fund Prospectus for a description of Exchange Fund distribution
fees). Exchanges may be made after the shares of the fund acquired by
purchase (not by exchange or dividend reinvestment) have been held for thirty
days. There is no waiting period for exchanges of shares acquired by exchange
or dividend reinvestment.
Additional Information Regarding Exchanges. Purchases and exchanges should
be made for investment purposes only. A pattern of frequent exchanges may be
deemed by the Distributor to be abusive and contrary to the best interests of
the Fund's other shareholders and, at the Distributor's discretion, may be
limited by the Fund's refusal to accept additional purchases and/or exchanges
from the investor. Although the Fund does not have any specific definition of
what constitutes a pattern of frequent exchanges, and will consider all
relevant factors in determining whether a particular situation is abusive and
contrary to the best interests of the Fund and its other shareholders,
investors should be aware that the Fund and each of the other Morgan Stanley
Dean Witter Funds may in their discretion limit or otherwise restrict the
number of times this Exchange Privilege may be exercised by any investor. Any
such restriction will be made by the Fund on a prospective basis only, upon
notice to the shareholder not later than ten days following such
shareholder's most recent exchange.
The Exchange Privilege may be terminated or revised at any time by the
Fund and/or any of such Morgan Stanley Dean Witter Funds for which shares of
the Fund may be exchanged, upon such notice as may be required by applicable
regulatory agencies (presently sixty days' prior written notice for
termination or material revision), provided that six months' prior written
notice of termination will be given to the shareholders who hold shares of
the Exchange Funds pursuant to this Exchange Privilege, and provided further
that the Exchange Privilege may be terminated or materially revised without
notice under certain unusual circumstances. Shareholders maintaining margin
accounts with DWR or another Selected Broker-Dealer are referred to their
Morgan Stanley Dean Witter Financial Advisor or other Selected Broker-Dealer
representative regarding restrictions on exchange of shares of the Fund
pledged in their margin account.
The current prospectus for each fund describes its investment objective(s)
and policies, and shareholders should obtain one and read it carefully before
investing. Exchanges are subject to the
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minimum investment requirement of each Class of shares and any other
conditions imposed by each fund. In the case of any shareholder holding a
share certificate or certificates, no exchanges may be made until all
applicable share certificates have been received by the Transfer Agent and
deposited in the shareholder's account. An exchange will be treated for
federal income tax purposes the same as a repurchase or redemption of shares,
on which the shareholder may realize a capital gain or loss. However, the
ability to deduct capital losses on an exchange may be limited in situations
where there is an exchange of shares within ninety days after the shares are
purchased. The Exchange Privilege is only available in states where an
exchange may legally be made.
If DWR or another Selected Broker-Dealer is the current broker-dealer of
record and its account numbers are part of the account information,
shareholders may initiate an exchange of shares of the Fund for shares of any
of the above Morgan Stanley Dean Witter Funds pursuant to this Exchange
Privilege by contacting their Morgan Stanley Dean Witter Financial Advisor or
other selected Broker-Dealer representative (no Exchange Privilege
Authorization Form is required). Other shareholders (and those shareholders
who are clients of DWR or another Selected Broker-Dealer but who wish to make
exchanges directly by writing or telephoning the Transfer Agent) must
complete and forward to the Transfer Agent an Exchange Privilege
Authorization Form, copies of which may be obtained from the Transfer Agent,
to initiate an exchange. If the Authorization Form is used, exchanges may be
made by contacting the Transfer Agent at (800) 869-NEWS (toll-free).
The Fund will employ reasonable procedures to confirm that exchange
instructions communicated over the telephone are genuine. Such procedures
include requiring various forms of personal identification such as name,
mailing address, social security or other tax identification number and DWR
or other Selected Broker-Dealer account number (if any). Telephone
instructions will also be recorded. If such procedures are not employed, the
Fund may be liable for any losses due to unauthorized or fraudulent
instructions.
Telephone exchange instructions will be accepted if received by the
Transfer Agent between 9:00 a.m. and 4:00 p.m. New York time, on any day the
New York Stock Exchange is open. Any shareholder wishing to make an exchange
who has previously filed an Exchange Privilege Authorization Form and who is
unable to reach the Fund by telephone should contact his or her Morgan
Stanley Dean Witter Financial Advisor or other Selected Broker-Dealer
representative, if appropriate, or make a written exchange request.
Shareholders are advised that during periods of drastic economic or market
changes it is possible that the telephone exchange procedures may be
difficult to implement, although this has not been the experience of the
Morgan Stanley Dean Witter Funds in the past.
For further information regarding the Exchange Privilege, shareholders
should contact their Morgan Stanley Dean Witter Financial Advisor or other
Selected Broker-Dealer representative or the Transfer Agent.
REDEMPTIONS AND REPURCHASES
- -----------------------------------------------------------------------------
Redemption. Shares of the Fund can be redeemed for cash at any time at its
respective current net asset value per share (without any redemption or other
charge). If shares are held in a shareholder's account without a share
certificate, a written request for redemption is required. If certificates
are held by the shareholder, the shares may be redeemed by surrendering the
certificates with a written request for redemption along with any additional
documentation required by the Transfer Agent, to the Fund's Transfer Agent at
P.O. Box 983, Jersey City, NJ 07303.
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Repurchase. DWR and other Selected Broker-Dealers are authorized to
repurchase shares represented by a share certificate which is delivered to
any of their offices. Shares held in a shareholder's account without a share
certificate may also be repurchased by DWR and other Selected Broker-Dealers
upon the telephonic request of the shareholder. The repurchase price is the
net asset value next determined (see "Purchase of Fund Shares--Determination
of Net Asset Value") after such repurchase order is received by DWR and other
Selected Broker-Dealers.
Payment for Shares Redeemed or Repurchased. Payment for shares presented
for repurchase or redemption will be made by check within seven days after
receipt by the Transfer Agent of the certificate and/or written request in
good order. Such payment may be postponed or the right of redemption
suspended under unusual circumstances. If the shares to be redeemed have
recently been purchased by check, payment of the redemption proceeds may be
delayed for the minimum time needed to verify that the check used for
investment has been honored (not more than fifteen days from the time of
receipt of the check by the Transfer Agent). Shareholders maintaining margin
accounts with DWR or another Selected Broker-Dealer are referred to their
Morgan Stanley Dean Witter Financial Advisor or other Selected Broker-Dealer
representative regarding restrictions on redemption of shares of the Fund
pledged in the margin account.
Involuntary Redemption. The Fund reserves the right to redeem, on 60 days'
notice and at net asset value, the shares (other than shares held in an
Individual Retirement Account or Custodial Account under Section 403(b)(7) of
the Internal Revenue Code) of any shareholder whose shares have a value of
less than $100 as a result of redemptions or repurchases, or such lesser
amount as may be fixed by the Trustees or, in the case of an account opened
through EasyInvestSM, if after twelve months the shareholder has invested
less than $1,000 in the account. However, before the Fund redeems such shares
and sends the proceeds to the shareholder, it will notify the shareholder
that the value of the shares is less than the applicable amount and allow the
shareholder sixty days to make an additional investment in an amount which
will increase the value of his or her account to at least the applicable
amount before the redemption is processed.
Reinstatement Privilege. A shareholder who has had his or her shares
redeemed or repurchased and has not previously exercised this reinstatement
privilege may, within thirty days after the date of the redemption or
repurchase, reinstate any portion or all of the proceeds of such redemption
or repurchase in shares of a Morgan Stanley Dean Witter Fund at net asset
value next determined after a reinstatement request, together with the
proceeds, is received by the Transfer Agent and receive a pro-rata credit for
any CDSC paid in connection with such redemption or repurchase.
DIVIDENDS, DISTRIBUTIONS AND TAXES
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Dividends and Distributions. The Fund declares dividends on each day the
New York Stock Exchange is open for business. Such dividends are payable
monthly. The Fund intends to distribute substantially all of its daily net
investment income on an annual basis. Dividends from net short-term or net
long-term capital gains, if any, will be paid at least once each year. The
Fund may, however, determine either to distribute or to retain all or part of
any net long-term capital gains in any year for reinvestment. Any dividends
or distributions declared in the last quarter of any calendar year which are
paid in the following calendar year prior to February 1 will be deemed
received by the shareholder in the prior calendar year. Shareholders may
instruct the Transfer Agent (in writing) to have their dividends paid out
monthly in cash. Processing of dividend checks begins immediately following
the monthly payment date. Shareholders who have requested to receive
dividends in cash will normally be sent their monthly dividend check during
the first ten days of the following month.
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Taxes. Because the Fund intends to distribute substantially all of its net
investment income and net capital gains, if any, to shareholders, and intends
to otherwise comply with all the provisions of Subchapter M of the Internal
Revenue Code of 1986, as amended (the "Code"), to qualify as a regulated
investment company ("RIC"), it is not expected that the Fund will be required
to pay any federal income tax.
The Fund intends to qualify to pay "exempt-interest dividends" to its
shareholders by maintaining, as of the close of each quarter of its taxable
year, at least 50% of the value of its total assets in tax-exempt securities.
If the fund qualifies as a RIC and satisfies such requirement, dividends from
net investment income to shareholders, whether taken in cash or reinvested in
additional Fund shares, will be excludable from gross income for federal
income tax purposes to the extent net interest income is represented by
interest on tax-exempt securities. Exempt-interest dividends are included,
however, in determining what portion, if any, of a person's Social Security
benefits are subject to federal income tax.
The Code subjects interest received on certain otherwise tax-exempt
securities to an alternative minimum tax. This alternative minimum tax
applies to interest received on "private activity bonds" (in general, bonds
that benefit non-governmental entities) issued after August 7, 1986 which,
although tax-exempt, are used for purposes other than those generally
performed by governmental units (e.g., bonds used for commercial or housing
purposes). Income received on such bonds is classified as a "tax preference
item," under the alternative minimum tax, for both individual and corporate
investors. There is no percentage limitation with respect to the Fund's
investments in such "private activity bonds," with the result that a portion
of the exempt-interest dividends paid by the Fund may be an item of tax
preference to shareholders subject to the alternative minimum tax. In
addition, certain corporations which are subject to the alternative minimum
tax may have to include a portion of exempt-interest dividends in calculating
their alternative minimum taxable income in situations where the "adjusted
current earnings" of the corporation exceeds its alternative minimum taxable
income.
The Fund will mail to shareholders a statement indicating the percentage
of the dividend distributions for each taxable year which constitutes
exempt-interest dividends and the percentage, if any, that is taxable, and
the percentage, if any, of the exempt-interest dividends which constitutes an
item of tax preference.
Shareholders will normally be subject to federal personal income tax on
market discount on certain taxable and tax-exempt fixed-income securities,
dividends paid from interest income derived from taxable securities and on
distributions of net capital gains. For federal income tax purposes,
distributions of long-term capital gains, if any, are taxable to shareholders
as long-term capital gains, regardless of how long a shareholder has held the
Fund's shares and regardless of whether the distribution is received in
additional shares or cash. To avoid being subject to a 31% backup withholding
tax on taxable dividends and capital gains distributions and the proceeds of
redemptions and repurchases, shareholders' taxpayer identification numbers
must be furnished and certified as to accuracy. Interest on indebtedness
incurred by shareholders or related parties to purchase or carry shares of an
investment company paying exempt-interest dividends, such as the Fund, will
not be deductible by the investor for federal income tax purposes.
Under the Revenue Reconciliation Act of 1993, all or a portion of the
Fund's gain from the sale or redemption of tax-exempt obligations purchased
at a market discount after April 30, 1993 will be treated as ordinary income
rather than capital gain. This rule may increase the amount of ordinary
income dividends received by shareholders.
The foregoing relates to federal income taxation as in effect as of the
date of this Prospectus. Distributions from investment income and capital
gains, including exempt-interest dividends, may be subject to state franchise
taxes if received by a
18
<PAGE>
corporation doing business in various states, and to state and local taxes.
Shareholders should consult their tax advisers as to the applicability of the
above to their own tax situation.
PERFORMANCE INFORMATION
- -----------------------------------------------------------------------------
From time to time the Fund may quote its "yield" and/or its "total return"
in advertisements and sales literature. Both the yield and the total return
of the Fund are based on historical earnings and are not intended to indicate
future performance. The yield of the Fund is computed by dividing the Fund's
net investment income over a 30-day period by an average value (using the
average number of shares entitled to receive dividends and the maximum
offering price per share at the end of the period), all in accordance with
applicable regulatory requirements. Such amount is compounded for six months
and then annualized for a twelve-month period to derive the Fund's yield. The
Fund may also quote tax-equivalent yield, which is calculated by determining
the pre-tax yield which, after being taxed at a stated rate, would be
equivalent to the yield determined as described above.
The "average annual total return" of the Fund refers to a figure
reflecting the average annualized percentage increase (or decrease) in the
value of an initial investment of $1,000 over periods of one, five and ten
years, as well as the life of the Fund if less than any of the foregoing.
Average annual total return reflects all income earned by the Fund, any
appreciation or depreciation of the Fund's assets and all expenses incurred
by the Fund for the stated periods. It also assumes reinvestment of all
dividends and distributions paid by the Fund.
In addition to the foregoing, the Fund may advertise its total return over
different periods of time by means of aggregate, average, year-by-year or
other types of total return figures. The Fund may also advertise the growth
of hypothetical investments of $10,000, $50,000 and $100,000 in shares of the
Fund. The Fund from time to time may also advertise its performance relative
to certain performance rankings (such as Lipper Analytical Services Inc.) and
indices compiled by independent organizations (such as the Lehman Brothers
Municipal Bond Index and Sub-indices).
ADDITIONAL INFORMATION
- -----------------------------------------------------------------------------
Voting Rights. All shares of beneficial interest of the Fund are of $0.01
par value and are equal as to earnings, assets and voting privileges.
The Fund is not required to hold Annual Meetings of Shareholders and, in
ordinary circumstances, the Fund does not intend to hold such meetings.
Under Massachusetts law, shareholders of a business trust may, under
certain circumstances, be held personally liable as partners for obligations
of the Fund. However, the Declaration of Trust contains an express disclaimer
of shareholder liability for acts or obligations of the Fund, requires that
Fund documents include such disclaimer and provides for indemnification and
reimbursement of expenses out of the Fund's property for any shareholder held
personally liable for the obligations of the Fund. Thus, the risk of a
shareholder incurring financial loss on account of shareholder liability is
limited to circumstances in which the Fund itself would be unable to meet its
obligations. Given the above limitations on shareholder personal liability
and the nature of the Fund's assets and operations, the possibility of the
Fund being unable to meet its obligations is remote and, in the opinion of
Massachusetts counsel to the Fund, the risk to Fund shareholders of personal
liability is remote.
Code of Ethics. Directors, officers and employees of MSDW Advisors, MSDW
Services Inc. and
19
<PAGE>
MSDW Distributors are subject to a strict Code of Ethics adopted by those
companies. The Code of Ethics is intended to ensure that the interests of
shareholders and other clients are placed ahead of any personal interest,
that no undue personal benefit is obtained from a person's employment
activities and that actual and potential conflicts of interest are avoided.
To achieve these goals and comply with regulatory requirements, the Code of
Ethics requires, among other things, that personal securities transactions by
employees of the companies be subject to an advance clearance process to
monitor that no Morgan Stanley Dean Witter Fund is engaged at the same time
in a purchase or sale of the same security. The Code of Ethics bans the
purchase of securities in an initial public offering, and also prohibits
engaging in futures and options transactions and profiting on short-term
trading (that is, a purchase within 60 days of a sale or a sale within 60
days of a purchase) of a security. In addition, investment personnel may not
purchase or sell a security for their personal account within 30 days before
or after any transaction in any Morgan Stanley Dean Witter Fund managed by
them. Any violations of the Code of Ethics are subject to sanctions,
including reprimand, demotion or suspension or termination of employment. The
Code of Ethics comports with regulatory requirements and the recommendations
in the 1994 report by the Investment Company Institute Advisory Group on
Personal Investing.
Master/Feeder Conversion. The Fund reserves the right to seek to achieve
its investment objective by investing all of its investable assets in a
diversified, open-end management investment company having the same
investment objective and policies and substantially the same investment
restrictions as those applicable to the Fund.
Shareholder Inquiries. All inquiries regarding the Fund should be directed
to the Fund at the telephone numbers or addresses set forth on the front
cover of this Prospectus.
20
<PAGE>
Morgan Stanley Dean Witter
Limited Term Municipal Trust
Two World Trade Center
New York, New York 10048
TRUSTEES
Michael Bozic
Charles A. Fiumefreddo
Edwin J. Garn
John R. Haire
Wayne E. Hedien
Dr. Manuel H. Johnson
Michael E. Nugent
Philip J. Purcell
John L. Schroeder
OFFICERS
Charles A. Fiumefreddo
Chairman and Chief Executive Officer
Barry Fink
Vice President, Secretary and General Counsel
Katherine H. Stromberg
Vice President
Thomas F. Caloia
Treasurer
CUSTODIAN
The Bank of New York
90 Washington Street
New York, New York 10286
TRANSFER AGENT AND
DIVIDEND DISBURSING AGENT
Morgan Stanley Dean Witter Trust FSB
Harborside Financial Center
Plaza Two
Jersey City, New Jersey 07311
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP
1177 Avenue of the Americas
New York, New York 10036
INVESTMENT MANAGER
Morgan Stanley Dean Witter Advisors Inc.
MORGAN STANLEY
DEAN WITTER
LIMITED TERM
MUNICIPAL TRUST
PROSPECTUS--JUNE 30, 1998
<PAGE>
MORGAN STANLEY DEAN WITTER
LIMITED TERM
MUNICIPAL TRUST
STATEMENT OF ADDITIONAL INFORMATION
JUNE 30, 1998
- -----------------------------------------------------------------------------
Morgan Stanley Dean Witter Limited Term Municipal Trust (the "Fund") is an
open-end, diversified management investment company whose investment
objective is to provide a high level of current income exempt from federal
income tax, consistent with the preservation of capital and prescribed
standards of quality and maturity. The Fund seeks to achieve its objective by
investing predominately in intermediate term high quality municipal
securities with an anticipated average dollar-weighted maturity range of 7 to
10 years and a average maximum dollar-weighted maturity of 12 years. (See
"Investment Objective and Policies.")
A Prospectus for the Fund dated June 30, 1998, which provides the basic
information you should know before investing in the Fund, may be obtained
without charge from the Fund at its address or telephone numbers listed below
or from the Fund's Distributor, Morgan Stanley Dean Witter Distributors Inc.,
or from Dean Witter Reynolds Inc. at any of its branch offices. This
Statement of Additional Information is not a Prospectus. It contains
information in addition to and more detailed than that set forth in the
Prospectus. It is intended to provide additional information regarding the
activities and operations of the Fund, and should be read in conjunction with
the Prospectus.
Morgan Stanley Dean Witter
Limited Term Municipal Trust
Two World Trade Center
New York, New York 10048
(212) 392-2550 or
(800) 869-NEWS (toll-free)
<PAGE>
TABLE OF CONTENTS
- -----------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
The Fund and its Management ........................................... 3
Trustees and Officers ................................................. 7
Investment Practices and Policies .................................... 13
Investment Restrictions ............................................... 21
Portfolio Transactions and Brokerage .................................. 22
Purchase of Fund Shares ............................................... 23
Shareholder Services .................................................. 26
Redemptions and Repurchases ........................................... 30
Dividends, Distributions and Taxes ................................... 31
Performance Information ............................................... 34
Shares of the Fund .................................................... 35
Custodian and Transfer Agent .......................................... 35
Independent Accountants ............................................... 36
Reports to Shareholders ............................................... 36
Legal Counsel ......................................................... 36
Experts ............................................................... 36
Registration Statement ................................................ 36
Financial Statements--March 31, 1998 .................................. 37
Report of Independent Accountants ..................................... 48
Appendix .............................................................. 49
</TABLE>
2
<PAGE>
THE FUND AND ITS MANAGEMENT
- -----------------------------------------------------------------------------
THE FUND
The Fund is a trust of the type commonly known as a "Massachusetts
Business Trust" and was organized under the laws of the Commonwealth of
Massachusetts on February 25, 1993 under the name Dean Witter Limited Term
Municipal Trust. Effective June 22, 1998, the Trustees of the Fund adopted an
Amendment to the Declaration of Trust of the Fund changing the name of the
Fund to Morgan Stanley Dean Witter Limited Term Municipal Trust.
THE INVESTMENT MANAGER
Morgan Stanley Dean Witter Advisors Inc. (the "Investment Manager" or
"MSDW Advisors"), whose address is Two World Trade Center, New York, New York
10048, is the Fund's Investment Manager. MSDW Advisors is a wholly-owned
subsidiary of Morgan Stanley Dean Witter & Co. ("MSDW"), a Delaware
corporation. The daily management of the Fund and research relating to the
Fund's portfolio are conducted by or under the direction of officers of the
Fund and of the Investment Manager, subject to review by the Fund's Trustees.
Information as to these Trustees and Officers is contained under the caption
"Trustees and Officers".
MSDW Advisors is the investment manager or investment advisor of the
following investment companies, which are collectively referred to as the
"Morgan Stanley Dean Witter Funds":
<TABLE>
<CAPTION>
<S> <C>
OPEN-END FUNDS
1 Active Assets California Tax-Free Trust
2 Active Assets Government Securities Trust
3 Active Assets Money Trust
4 Active Assets Tax-Free Trust
5 Morgan Stanley Dean Witter American Value Fund
6 Morgan Stanley Dean Witter Balanced Growth Fund
7 Morgan Stanley Dean Witter Balanced Income Fund
8 Morgan Stanley Dean Witter California Tax-Free Daily Income Trust
9 Morgan Stanley Dean Witter California Tax-Free Income Fund
10 Morgan Stanley Dean Witter Capital Appreciation Fund
11 Morgan Stanley Dean Witter Capital Growth Securities
12 Morgan Stanley Dean Witter Competitive Edge Fund, "Best Ideas" Portfolio
13 Morgan Stanley Dean Witter Convertible Securities Trust
14 Morgan Stanley Dean Witter Developing Growth Securities Trust
15 Morgan Stanley Dean Witter Diversified Income Trust
16 Morgan Stanley Dean Witter Dividend Growth Securities Inc.
17 Morgan Stanley Dean Witter Equity Fund
18 Morgan Stanley Dean Witter European Growth Fund Inc.
19 Morgan Stanley Dean Witter Federal Securities Trust
20 Morgan Stanley Dean Witter Financial Services Trust
21 Morgan Stanley Dean Witter Fund of Funds
22 Dean Witter Global Asset Allocation Fund
23 Morgan Stanley Dean Witter Global Dividend Growth Securities
24 Morgan Stanley Dean Witter Global Short-Term Income Fund Inc.
25 Morgan Stanley Dean Witter Global Utilities Fund
26 Morgan Stanley Dean Witter Growth Fund
3
<PAGE>
27 Morgan Stanley Dean Witter Hawaii Municipal Trust
28 Morgan Stanley Dean Witter Health Sciences Trust
29 Morgan Stanley Dean Witter High Yield Securities Inc.
30 Morgan Stanley Dean Witter Income Builder Fund
31 Morgan Stanley Dean Witter Information Fund
32 Morgan Stanley Dean Witter Intermediate Income Securities
33 Morgan Stanley Dean Witter Intermediate Term U.S. Treasury Trust
34 Morgan Stanley Dean Witter International SmallCap Fund
35 Morgan Stanley Dean Witter Japan Fund
36 Morgan Stanley Dean Witter Limited Term Municipal Trust
37 Morgan Stanley Dean Witter Liquid Asset Fund Inc.
38 Morgan Stanley Dean Witter Market Leader Trust
39 Morgan Stanley Dean Witter Mid-Cap Dividend Growth Securities
40 Morgan Stanley Dean Witter Mid-Cap Growth Fund
41 Morgan Stanley Dean Witter Multi-State Municipal Series Trust
42 Morgan Stanley Dean Witter Natural Resource Development Securities Inc.
43 Morgan Stanley Dean Witter New York Municipal Money Market Trust
44 Morgan Stanley Dean Witter New York Tax-Free Income Fund
45 Morgan Stanley Dean Witter Pacific Growth Fund Inc.
46 Morgan Stanley Dean Witter Precious Metals and Minerals Trust
47 Dean Witter Retirement Series
48 Morgan Stanley Dean Witter Select Dimensions Investment Series
49 Morgan Stanley Dean Witter Select Municipal Reinvestment Fund
50 Morgan Stanley Dean Witter Short-Term Bond Fund
51 Morgan Stanley Dean Witter Short-Term U.S. Treasury Trust
52 Morgan Stanley Dean Witter Special Value Fund
53 Morgan Stanley Dean Witter S&P 500 Index Fund
54 Morgan Stanley Dean Witter Strategist Fund
55 Morgan Stanley Dean Witter Tax-Exempt Securities Trust
56 Morgan Stanley Dean Witter Tax-Free Daily Income Trust
57 Morgan Stanley Dean Witter U.S. Government Money Market Trust
58 Morgan Stanley Dean Witter U.S. Government Securities Trust
59 Morgan Stanley Dean Witter Utilities Fund
60 Morgan Stanley Dean Witter Value-Added Market Series
61 Morgan Stanley Dean Witter Variable Investment Series
62 Morgan Stanley Dean Witter World Wide Income Trust
CLOSED-END FUNDS
1 InterCapital California Insured Municipal Income Trust
2 InterCapital California Quality Municipal Securities
3 Dean Witter Government Income Trust
4 High Income Advantage Trust
5 High Income Advantage Trust II
6 High Income Advantage Trust III
7 InterCapital Income Securities Inc.
8 InterCapital Insured California Municipal Securities
4
<PAGE>
9 InterCapital Insured Municipal Bond Trust
10 InterCapital Insured Municipal Income Trust
11 InterCapital Insured Municipal Securities
12 InterCapital Insured Municipal Trust
13 Municipal Income Opportunities Trust
14 Municipal Income Opportunities Trust II
15 Municipal Income Opportunities Trust III
16 Municipal Income Trust
17 Municipal Income Trust II
18 Municipal Income Trust III
19 Municipal Premium Income Trust
20 InterCapital New York Quality Municipal Securities
21 Morgan Stanley Dean Witter Prime Income Trust
22 InterCapital Quality Municipal Income Trust
23 InterCapital Quality Municipal Investment Trust
24 InterCapital Quality Municipal Securities
</TABLE>
In addition, Morgan Stanley Dean Witter Services Company Inc. ("MSDW
Services"), a wholly-owned subsidiary of MSDW Advisors, serves as manager for
the following investment companies for which TCW Funds Management, Inc. is
the investment advisor (the "TCW/DW Funds"):
<TABLE>
<CAPTION>
<S> <C>
OPEN-END FUNDS
1 TCW/DW Emerging Markets Opportunities Trust
2 TCW/DW Global Telecom Trust
3 TCW/DW Income and Growth Fund
4 TCW/DW Latin American Growth Fund
5 TCW/DW Mid-Cap Equity Trust
6 TCW/DW North American Government Income Trust
7 TCW/DW Small Cap Growth Fund
8 TCW/DW Total Return Trust
CLOSED-END FUNDS
1 TCW/DW Term Trust 2000
2 TCW/DW Term Trust 2002
3 TCW/DW Term Trust 2003
</TABLE>
MSDW Advisors also serves as: (i) administrator of The BlackRock Strategic
Term Trust Inc., a closed-end investment company; (ii) sub-administrator of
Templeton Global Governments Income Trust, a closed-end investment company;
and (iii) investment advisor of Offshore Dividend Growth Fund and Offshore
Money Market Fund, mutual funds established under the laws of the Cayman
Islands and available only to investors who are participants in DWR's
International Active Assets Account program and are neither citizens nor
residents of the United States.
Pursuant to an Investment Management Agreement (the "Agreement") with the
Investment Manager, the Fund has retained the Investment Manager to manage
the investment of the Fund's assets, including the placing of orders for the
purchase and sale of portfolio securities. The Investment Manager obtains and
evaluates such information and advice relating to the economy, securities
markets, and specific securities as it considers necessary or useful to
continuously manage the assets of the Fund in a manner consistent with its
investment objective.
Under the terms of the Agreement, in addition to managing the Fund's
investments, the Investment Manager maintains certain of the Fund's books and
records and furnishes, at its own expense, such
5
<PAGE>
office space, facilities, equipment, clerical help and bookkeeping and
certain legal services as the Fund may reasonably require in the conduct of
its business, including the preparation of prospectuses, statements of
additional information, proxy statements and reports required to be filed
with federal and state securities commissions (except insofar as the
participation or assistance of independent accountants and attorneys is, in
the opinion of the Investment Manager, necessary or desirable). In addition,
the Investment Manager pays the salaries of all personnel, including officers
of the Fund, who are employees of the Investment Manager. The Investment
Manager also bears the cost of telephone service, heat, light, power and
other utilities provided to the Fund. The Investment Manager has retained
MSDW Services to provide its administrative services under the Agreement.
The Fund pays all expenses incurred in its operation. Expenses not
expressly assumed by the Investment Manager under the Agreement or by Morgan
Stanley Dean Witter Distributors Inc. ("MSDW Distributors" or the
"Distributor"), the Distributor of the Fund's shares (see "Purchase of Fund
Shares") will be paid by the Fund. Such expenses include, but are not limited
to: charges and expenses of any registrar; custodian, stock transfer and
dividend disbursing agent; brokerage commissions; taxes; engraving and
printing of share certificates; registration costs of the Fund and its shares
under federal and state securities laws; the cost and expense of printing,
including typesetting, and distributing Prospectuses and Statements of
Additional Information of the Fund and supplements thereto to the Fund's
shareholders; all expenses of shareholders' and Trustees' meetings and of
preparing, printing and mailing of proxy statements and reports to
shareholders; fees and travel expenses of Trustees or members of any advisory
board or committee who are not employees of the Investment Manager or any
corporate affiliate of the Investment Manager; all expenses incident to any
dividend, withdrawal or redemption options; charges and expenses of any
outside service used for pricing of the Fund's shares; fees and expenses of
legal counsel, including counsel to the Trustees who are not interested
persons of the Fund or of the Investment Manager (not including compensation
or expenses of attorneys who are employees of the Investment Manager) and
independent accountants; membership dues of industry associations; interest
on the Fund's borrowings; postage; insurance premiums on property or
personnel (including officers and Trustees) of the Fund which inure to its
benefit; extraordinary expenses including, but not limited to, legal claims
and liabilities and litigation costs and any indemnification relating thereto
(depending upon the nature of the legal claim, liability or lawsuit), the
costs of litigation, payment of legal claims or liabilities or
indemnification relating thereto; and all other costs of the Fund's
operations properly payable by the Fund.
As full compensation for the services and facilities furnished to the Fund
and expenses of the Fund assumed by the Investment Manager, the Fund pays the
Investment Manager monthly compensation calculated daily by applying the
annual rate of 0.50% to the daily net assets of the Fund. For the fiscal
years ended March 31, 1996, 1997 and 1998, the Fund accrued to the Investment
Manager monthly compensation under the Agreement of $401,513, $331,532 and
$281,962, respectively.
The Agreement provides that in the absence of willful misfeasance, bad
faith, gross negligence or reckless disregard of its obligations thereunder,
the Investment Manager is not liable to the Fund or any of its investors for
any act or omission by the Investment Manager or for any losses sustained by
the Fund or its investors. The Agreement in no way restricts the Investment
Manager from acting as investment manager or adviser to others.
The Investment Manager paid the organizational expenses of the Fund
incurred prior to the offering of the Fund's shares. The Fund agreed to bear
and reimburse the Investment Manager for such expenses which totalled
approximately $140,000. The Fund has deferred and is amortizing these
organizational expenses on the straight line method over a period not to
exceed five years from the date of commencement of the Fund's operations.
The Agreement was initially approved by the Trustees on February 21, 1997
and by the shareholders of the Fund at a Special Meeting of Shareholders held
on May 21, 1997. The Agreement is substantially identical to a prior
investment management agreement which was initially approved by the Trustees
on October 30, 1992 and by the shareholders of the Fund at a Special Meeting
of Shareholders held on January 12, 1993. The Agreement took effect on May
31, 1997 upon the
6
<PAGE>
consummation of the merger of Dean Witter, Discover & Co. with Morgan Stanley
Group Inc. The Agreement may be terminated at any time, without penalty, on
thirty days' notice by the Board of Trustees of the Fund, by the holders of a
majority, as defined in the Investment Company Act of 1940 (the "Act"), of
the outstanding shares of the Fund, or by the Investment Manager. The
Agreement will automatically terminate in the event of its assignment (as
defined in the Act).
By its terms, the Agreement has an initial term ending April 30, 1999, and
provides that it will continue from year to year thereafter, provided
continuance of the Agreement is approved at least annually by the vote of the
holders of a majority of the outstanding shares of the Fund, as defined in
the Act, or by the Trustees of the Fund; provided that in either event such
continuance is approved annually by the vote of a majority of the Trustees of
the Fund who are not parties to the Agreement or "interested persons" (as
defined in the Act) of any such party (the "Independent Trustees"), which
vote must be cast in person at a meeting called for the purpose of voting on
such approval.
The following owned 5% or more of the outstanding shares of beneficial
interest on June 6, 1998: Doug Rebak, 820 Minsi Trail, Franklin Lakes, NJ,
07417-2114--6.84%.
The Fund has acknowledged that the name "Morgan Stanley Dean Witter" is a
property right of MSDW. The Fund has agreed that MSDW, or any corporate
affiliate of MSDW, may use, or at any time permit others to use, the name
"Morgan Stanley Dean Witter." The Fund has also agreed that in the event the
investment management contract between the Investment Manager and the Fund is
terminated, or if the affiliation between MSDW Advisors and its parent
company is terminated, the Fund will eliminate the name "Morgan Stanley Dean
Witter" from its name if MSDW, or any corporate affiliate of MSDW, shall so
request.
TRUSTEES AND OFFICERS
- -----------------------------------------------------------------------------
The Trustees and Executive Officers of the Fund, their principal business
occupations during the last five years and their affiliations, if any, with
MSDW Advisors, and with the 86 Morgan Stanley Dean Witter Funds and the 11
TCW/DW Funds are shown below:
<TABLE>
<CAPTION>
NAME, AGE, POSITION WITH FUND
AND ADDRESS PRINCIPAL OCCUPATIONS DURING LAST FIVE YEARS
- ----------------------------------------- -------------------------------------------------------------------------
<S> <C>
Michael Bozic (57) Chairman and Chief Executive Officer of Levitz Furniture (since November,
Trustee 1995); Director or Trustee of the Morgan Stanley Dean Witter Funds;
c/o Levitz Furniture Corporation formerly President and Chief Executive Officer of Hills Department
7887 N. Federal Highway Stores (May, 1991-July, 1995); formerly variously Chairman, Chief
Boca Raton, Florida Executive Officer, President and Chief Operating Officer (1987-1991)
of the Sears Merchandise Group of Sears, Roebuck and Co.; Director
of Eaglemark Financial Services, Inc. and Weirton Steel Corporation.
Charles A. Fiumefreddo* (65) Chairman, Director or Trustee, President and Chief Executive Officer
Chairman, President of the Morgan Stanley Dean Witter Funds; Chairman, Chief Executive
Chief Executive Officer and Trustee Officer and Trustee of the TCW/DW Funds; formerly Chairman, Chief
Two World Trade Center Executive Officer and Director of MSDW Advisors, MSDW Distributors
New York, New York and MSDW Services, Executive Vice President and Director of Dean Witter
Reynolds Inc. ("DWR"), Chairman and Director of Morgan Stanley Dean
Witter Trust FSB ("MSDW Trust"), and Director and/or officer of various
MSDW subsidiaries (until June, 1998).
7
<PAGE>
NAME, AGE, POSITION WITH FUND
AND ADDRESS PRINCIPAL OCCUPATIONS DURING LAST FIVE YEARS
- ----------------------------------------- -------------------------------------------------------------------------
Edwin J. Garn (65) Director or Trustee of the Morgan Stanley Dean Witter Funds; formerly
Trustee United States Senator (R-Utah)(1974-1992) and Chairman, Senate Banking
c/o Huntsman Corporation 500 Huntsman Way Committee (1980-1986); formerly Mayor of Salt Lake City, Utah
Salt Lake City, Utah (1971-1974); formerly Astronaut, Space Shuttle Discovery (April 12-19,
1985); Vice Chairman, Huntsman Corporation (since January, 1993);
Director of Franklin Covey (time management systems), John Alden
Financial Corp (health insurance), United Space Alliance (joint venture
between Lockheed Martin and the Boeing Company) and Nuskin Asia Pacific
(multilevel marketing); Member of the board of various civic and
charitable organizations.
John R. Haire (73) Chairman of the Audit Committee and Director or Trustee of the Morgan
Trustee Stanley Dean Witter Funds; Chairman of the Audit Committee and Trustee
Two World Trade Center of the TCW/DW Funds; formerly Chairman of the Independent Directors
New York, New York or Trustees of the Morgan Stanley Dean Witter Funds and the TCW/DW
Funds (until June, 1998); formerly President, Council for Aid to
Education (1978-1989) and Chairman and Chief Executive Officer of
Anchor Corporation, an Investment Adviser (1964-1978).
Wayne E. Hedien (64) Retired; Director or Trustee of the Morgan Stanley Dean Witter Funds;
Trustee Director of The PMI Group, Inc. (private mortgage insurance); Trustee
c/o Gordon Altman Butowsky and Vice Chairman of The Field Museum of Natural History; formerly
Weitzen Shalov & Wein associated with the Allstate Companies (1966-1994), most recently
Counsel to the Independent as Chairman of The Allstate Corporation (March, 1993-December, 1994)
Trustees and Chairman and Chief Executive Officer of its wholly-owned subsidiary,
114 West 47th Street Allstate Insurance Company (July, 1989-December, 1994); director of
New York, New York various other business and charitable organizations.
Dr. Manuel H. Johnson (49) Senior Partner, Johnson Smick International, Inc., a consulting firm;
Trustee Co-Chairman and a founder of the Group of Seven Council (G7C), an
c/o Johnson Smick International, Inc. international economic commission; Director or Trustee of the Morgan
1133 Connecticut Avenue, N.W. Stanley Dean Witter Funds; Trustee of the TCW/DW Funds; Director of
Washington, D.C. NASDAQ (since June, 1995); Director of Greenwich Capital Markets Inc.
(broker-dealer); and NVR, Inc. (home construction); Chairman and Trustee
of the Financial Accounting Foundation (oversight organization of
the Financial Accounting Standards Board); formerly Vice Chairman
of the Board of Governors of the Federal Reserve System (1986-1990)
and Assistant Secretary of the U.S. Treasury (1982-1988).
Michael E. Nugent (62) General Partner, Triumph Capital, L.P., a private investment
Trustee partnership; Director or Trustee of the Morgan Stanley Dean Witter
c/o Triumph Capital, L.P. Funds; Trustee of the TCW/DW Funds; formerly Vice President, Bankers
237 Park Avenue Trust Company and BT Capital Corporation (1984-1988); director of
New York, New York various business organizations.
8
<PAGE>
NAME, AGE, POSITION WITH FUND
AND ADDRESS PRINCIPAL OCCUPATIONS DURING LAST FIVE YEARS
- ----------------------------------------- -------------------------------------------------------------------------
Philip J. Purcell* (54) Chairman of the Board of Directors and Chief Executive Officer of
Trustee MSDW, DWR and Novus Credit Services Inc.; Director of MSDW Advisors,
Two World Trade Center MSDW Services and MSDW Distributors; Director or Trustee of the Morgan
New York, New York Stanley Dean Witter Funds; director and/or officer of various MSDW
subsidiaries.
John L. Schroeder (67) Retired; Director or Trustee of the Morgan Stanley Dean Witter Funds;
Trustee Trustee of the TCW/DW Funds; Director of Citizens Utilities Company;
c/o Gordon Altman Butowsky formerly Executive Vice President and Chief Investment Officer of
Weitzen Shalov & Wein the Home Insurance Company (August, 1991-September, 1995).
Counsel to the Independent Trustees
114 West 47th Street
New York, New York
Barry Fink (43) Senior Vice President (since March, 1997) and Secretary and General
Vice President, Secretary Counsel (since February, 1997) of MSDW Advisors and MSDW Services;
and General Counsel Senior Vice President (since March, 1997) and Assistant Secretary
Two World Trade Center and Assistant General Counsel (since February, 1997) of MSDW
New York, New York Distributors; Assistant Secretary of DWR (since August, 1996); Vice
President, Secretary and General Counsel of the Morgan Stanley Dean
Witter Funds and the TCW/DW Funds (since February, 1997); previously
First Vice President (June, 1993-February, 1997), Vice President (until
June, 1993) and Assistant Secretary and Assistant General Counsel
of MSDW Advisors and MSDW Services and Assistant Secretary of the
Morgan Stanley Dean Witter Funds and the TCW/DW Funds.
Katherine H. Stromberg (49) Vice President of MSDW Advisors; Vice President of various Morgan
Vice President Stanley Dean Witter Funds.
Two World Trade Center
New York, New York
Thomas F. Caloia (52) First Vice President and Assistant Treasurer of MSDW Advisors and
Treasurer MSDW Services; Treasurer of the Morgan Stanley Dean Witter Funds and
Two World Trade Center the TCW/DW Funds.
New York, New York
</TABLE>
- --------------
* Denotes Trustees who are "interested persons" of the Fund, as defined in
the Act.
In addition, Mitchell M. Merin, President, Chief Executive Officer and
Director of MSDW Advisors and MSDW Services, Chairman and Director of MSDW
Distributors and MSDW Trust, Executive Vice President and Director of DWR,
and Director of SPS Transaction Services, Inc. and various other MSDW
subsidiaries, Robert M. Scanlan, President and Chief Operating Officer of
MSDW Advisors and MSDW Services, Executive Vice President of MSDW
Distributors and MSDW Trust and Director of MSDW Trust, Robert S. Giambrone,
Senior Vice President of MSDW Advisors, MSDW Services, MSDW Distributors and
MSDW Trust and Director of MSDW Trust, Joseph J. McAlinden, Executive Vice
President and Chief Investment Officer of MSDW Advisors and Director of MSDW
Trust, and Peter M. Avelar, Jonathan R. Page and James F. Willison, Senior
Vice Presidents of MSDW Advisors, and Joseph Arcieri and Gerard J. Lian, Vice
Presidents of MSDW Advisors are Vice Presidents of the Fund, and Marilyn K.
Cranney and Carsten Otto, First Vice Presidents and Assistant General
Counsels of MSDW Advisors and MSDW
9
<PAGE>
Services, Frank Bruttomesso, LouAnne D. McInnis and Ruth Rossi, Vice
Presidents and Assistant General Counsels of MSDW Advisors and MSDW Services,
and Todd Lebo, a staff attorney with MSDW Advisors, are Assistant Secretaries
of the Fund.
THE BOARD OF TRUSTEES, THE INDEPENDENT TRUSTEES, AND THE COMMITTEES
The Board of Trustees consists of nine (9) trustees. These same
individuals also serve as directors or trustees for all of the Morgan Stanley
Dean Witter Funds, and are referred to in this section as Trustees. As of the
date of this Statement of Additional Information, there are a total of 86
Morgan Stanley Dean Witter Funds, comprised of 132 portfolios. As of May 31,
1998, the Morgan Stanley Dean Witter Funds had total net assets of
approximately $106 billion and more than six million shareholders.
Seven Trustees (77% of the total number) have no affiliation or business
connection with MSDW Advisors or any of its affiliated persons and do not own
any stock or other securities issued by MSDW Advisors' parent company, MSDW.
These are the "disinterested" or "independent" Trustees. Four of the seven
independent Trustees are also Independent Trustees of the TCW/DW Funds.
Law and regulation establish both general guidelines and specific duties
for the Independent Trustees. The Morgan Stanley Dean Witter Funds seek as
Independent Trustees individuals of distinction and experience in business
and finance, government service or academia; these are people whose advice
and counsel are in demand by others and for whom there is often competition.
To accept a position on the Funds' Boards, such individuals may reject other
attractive assignments because the Funds make substantial demands on their
time. Indeed, by serving on the Funds' Boards, certain Trustees who would
otherwise be qualified and in demand to serve on bank boards would be
prohibited by law from doing so.
All of the Independent Trustees serve as members of the Audit Committee.
Three of them also serve as members of the Derivatives Committee. During the
calendar year ended December 31, 1997, the Audit Committee, the Derivatives
Committee and the Independent Trustees held a combined total of seventeen
meetings.
The Independent Trustees are charged with recommending to the full Board
approval of management, advisory and administration contracts, Rule 12b-1
plans and distribution and underwriting agreements; continually reviewing
Fund performance; checking on the pricing of portfolio securities, brokerage
commissions, transfer agent costs and performance, and trading among Funds in
the same complex; and approving fidelity bond and related insurance coverage
and allocations, as well as other matters that arise from time to time. The
Independent Trustees are required to select and nominate individuals to fill
any Independent Trustee vacancy on the Board of any Fund that has a Rule
12b-1 plan of distribution. Most of the Morgan Stanley Dean Witter Funds have
such a plan.
The Audit Committee is charged with recommending to the full Board the
engagement or discharge of the Fund's independent accountants; directing
investigations into matters within the scope of the independent accountants'
duties, including the power to retain outside specialists; reviewing with the
independent accountants the audit plan and results of the auditing
engagement; approving professional services provided by the independent
accountants and other accounting firms prior to the performance of such
services; and reviewing the independence of the independent accountants;
considering the range of audit and non-audit fees; reviewing the adequacy of
the Fund's system of internal controls.
Finally, the Board of each Fund has formed a Derivatives Committee to
approve parameters for and monitor the activities of the Fund with respect to
derivative investments, if any, made by the Fund.
ADVANTAGES OF HAVING SAME INDIVIDUALS AS INDEPENDENT TRUSTEES FOR ALL MORGAN
STANLEY DEAN WITTER FUNDS
The Independent Trustees and the Funds' management believe that having the
same Independent Trustees for each of the Morgan Stanley Dean Witter Funds
avoids the duplication of effort that would arise from having different
groups of individuals serving as Independent Trustees for each of the Funds
or even of sub-groups of Funds. They believe that having the same individuals
serve as Independent
10
<PAGE>
Trustees of all the Funds tends to increase their knowledge and expertise
regarding matters which affect the Fund complex generally and enhances their
ability to negotiate on behalf of each Fund with the Fund's service
providers. This arrangement also precludes the possibility of separate groups
of Independent Trustees arriving at conflicting decisions regarding
operations and management of the Funds and avoids the cost and confusion that
would likely ensue. Finally, having the same Independent Trustees serve on
all Fund Boards enhances the ability of each Fund to obtain, at modest cost
to each separate Fund, the services of Independent Trustees of the caliber,
experience and business acumen of the individuals who serve as Independent
Trustees of the Morgan Stanley Dean Witter Funds.
COMPENSATION OF INDEPENDENT TRUSTEES
The Fund pays each Independent Trustee an annual fee of $800 plus a per
meeting fee of $50 for meetings of the Board of Trustees, the Independent
Trustees or Committees of the Board of Trustees attended by the Trustee (the
Fund pays the Chairman of the Audit Committee an additional annual fee of
$750). If a Board meeting and a meeting of the Independent Trustees or a
Committee meeting, or a meeting of the Independent Trustees and/or more than
one Committee meeting, take place on a single day, the Trustees are paid a
single meeting fee by the Fund. The Fund also reimburses such Trustees for
travel and other out-of-pocket expenses incurred by them in connection with
attending such meetings. Trustees who are or have been employed by the
Investment Manager or an affiliated company receive no compensation or
expense reimbursement from the Fund for their services as Trustee. Mr. Haire
currently serves as Chairman of the Audit Committee. Prior to June 1, 1998,
Mr. Haire also served as Chairman of the Independent Trustees, for which
services the Fund paid him an additional annual fee of $1,200.
The following table illustrates the compensation paid to the Fund's
Independent Trustees by the Fund for the fiscal year ended March 31, 1998.
FUND COMPENSATION
<TABLE>
<CAPTION>
AGGREGATE
COMPENSATION
NAME OF INDEPENDENT TRUSTEE FROM THE FUND
- --------------------------- -------------
<S> <C>
Michael Bozic .............. $1,550
Edwin J. Garn .............. 1,650
John R. Haire .............. 3,500
Wayne E. Hedien ............ 1,082
Dr. Manuel H. Johnson ..... 1,600
Michael E. Nugent .......... 1,650
John L. Schroeder........... 1,650
</TABLE>
11
<PAGE>
The following table illustrates the compensation paid to the Fund's
Independent Trustees for the calendar year ended December 31, 1997 for
services to the 84 Morgan Stanley Dean Witter Funds and, in the case of
Messrs. Haire, Johnson, Nugent and Schroeder, the 14 TCW/DW Funds that were
in operation at December 31, 1997. Mr. Haire serves as Chairman of the Audit
Committee of each Morgan Stanley Dean Witter Fund and each TCW/DW Fund and,
prior to June 1, 1998, also served as Chairman of the Independent Directors
or Trustees of those Funds. With respect to Messrs. Haire, Johnson, Nugent
and Schroeder, the TCW/DW Funds are included solely because of a limited
exchange privilege between those Funds and five Morgan Stanley Dean Witter
Money Market Funds. Mr. Hedien's term as Director or Trustee of each Morgan
Stanley Dean Witter Fund commenced on September 1, 1997.
CASH COMPENSATION FROM MORGAN STANLEY DEAN WITTER FUNDS AND TCW/DW FUNDS
<TABLE>
<CAPTION>
FOR SERVICE AS
CHAIRMAN OF
INDEPENDENT FOR SERVICE AS TOTAL CASH
FOR SERVICE DIRECTORS/ CHAIRMAN OF COMPENSATION
AS DIRECTOR OR FOR SERVICE AS TRUSTEES AND INDEPENDENT FOR SERVICES TO
TRUSTEE AND TRUSTEE AND AUDIT TRUSTEES 84 MORGAN STANLEY
COMMITTEE MEMBER COMMITTEE MEMBER COMMITTEES OF 84 AND AUDIT DEAN WITTER
NAME OF OF 84 MORGAN STANLEY OF 14 TCW/DW MORGAN STANLEY COMMITTEES OF 14 FUNDS AND 14
INDEPENDENT TRUSTEE DEAN WITTER FUNDS FUNDS DEAN WITTER FUNDS TCW/DW FUNDS TCW/DW FUNDS
- ------------------- ----------------- ----- ----------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Michael Bozic ........ $133,602 -- -- -- $133,602
Edwin J. Garn ........ 149,702 -- -- -- 149,702
John R. Haire ........ 149,702 $73,725 $157,463 $25,350 406,240
Wayne E. Hedien ...... 39,010 -- -- -- 39,010
Dr. Manuel H.
Johnson.............. 145,702 71,125 -- -- 216,827
Michael E. Nugent ... 149,702 73,725 -- -- 223,427
John L. Schroeder .... 149,702 73,725 -- -- 223,427
</TABLE>
As of the date of this Statement of Additional Information, 57 of the
Morgan Stanley Dean Witter Funds, including the Fund, have adopted a
retirement program under which an Independent Trustee who retires after
serving for at least five years (or such lesser period as may be determined
by the Board) as an Independent Director or Trustee of any Morgan Stanley
Dean Witter Fund that has adopted the retirement program (each such Fund
referred to as an "Adopting Fund" and each such Trustee referred to as an
"Eligible Trustee") is entitled to retirement payments upon reaching the
eligible retirement age (normally, after attaining age 72). Annual payments
are based upon length of service. Currently, upon retirement, each Eligible
Trustee is entitled to receive from the Adopting Fund, commencing as of his
or her retirement date and continuing for the remainder of his or her life,
an annual retirement benefit (the "Regular Benefit") equal to 29.41% of his
or her Eligible Compensation plus 0.4901667% of such Eligible Compensation
for each full month of service as an Independent Director or Trustee of any
Adopting Fund in excess of five years up to a maximum of 58.82% after ten
years of service. The foregoing percentages may be changed by the Board.(1)
"Eligible Compensation" is one-fifth of the total compensation earned by such
Eligible Trustee for service to the Adopting Fund in the five year period
prior to the date of the Eligible Trustee's retirement. Benefits under the
retirement program are not secured or funded by the Adopting Funds.
- ------------
(1) An Eligible Trustee may elect alternate payments of his or her
retirement benefits based upon the combined life expectancy of such
Eligible Trustee and his or her spouse on the date of such Eligible
Trustee's retirement. The amount estimated to be payable under this
method, through the remainder of the later of the lives of such
Eligible Trustee and spouse, will be the actuarial equivalent of the
Regular Benefit. In addition, the Eligible Trustee may elect that the
surviving spouse's periodic payment of benefits will be equal to either
50% or 100% of the previous periodic amount, an election that,
respectively, increases or decreases the previous periodic amount so
that the resulting payments will be the actuarial equivalent of the
Regular Benefit.
12
<PAGE>
The following table illustrates the retirement benefits accrued to the
Fund's Independent Trustees by the Fund for the fiscal year ended March 31,
1998 and by the 57 Morgan Stanley Dean Witter Funds (including the Fund) for
the year ended December 31, 1997, and the estimated retirement benefits for
the Fund's Independent Trustees, to commence upon their retirement, from the
Fund as of March 31, 1998 and from the 57 Morgan Stanley Dean Witter Funds as
of December 31, 1997.
RETIREMENT BENEFITS FROM THE FUND AND ALL MORGAN STANLEY DEAN WITTER FUNDS
<TABLE>
<CAPTION>
FOR ALL ADOPTING FUNDS ESTIMATED ANNUAL
-------------------------------- RETIREMENT BENEFITS BENEFITS
ESTIMATED ACCRUED AS EXPENSES UPON RETIREMENT(2)
CREDITED ----------------------- -------------------
YEARS ESTIMATED
OF SERVICE AT PERCENTAGE OF BY ALL FROM FROM ALL
RETIREMENT ELIGIBLE BY THE ADOPTING THE ADOPTING
NAME OF INDEPENDENT TRUSTEE (MAXIMUM 10) COMPENSATION FUND FUNDS FUND FUNDS
- --------------------------- --------------- --------------- -------- ------------- ------- ----------
<S> <C> <C> <C> <C> <C> <C>
Michael Bozic .............. 10 58.82% $ 358 $ 20,499 $ 971 $ 55,026
Edwin J. Garn .............. 10 58.82 596 30,878 971 55,026
John R. Haire .............. 10 58.82 2,396 (19,823)(3) 2,190 132,002
Wayne E. Hedien............. 9 50.00 185 0 825 46,772
Dr. Manuel H. Johnson ..... 10 58.82 241 12,832 971 55,026
Michael E. Nugent .......... 10 58.82 451 22,546 971 55,026
John L. Schroeder........... 8 49.02 689 39,350 815 46,123
</TABLE>
- --------------
(2) Based on current levels of compensation. Amount of annual benefits also
varies depending on the Trustee's elections described in Footnote (1)
above.
(3) This number reflects the effect of the extension of Mr. Haire's term as
Director or Trustee until May 1, 1999.
As of the date of this Statement of Additional Information, the aggregate
number of shares of beneficial interest of the Fund owned by the Fund's
officers and Trustees as a group was less than 1 percent of the Fund's shares
of beneficial interest outstanding.
INVESTMENT PRACTICES AND POLICIES
- -----------------------------------------------------------------------------
PORTFOLIO SECURITIES
Taxable Securities. As discussed in the Prospectus, the Fund may invest up
to 20% of its total assets in taxable money market instruments, under any one
of the following circumstances: (a) pending investment of proceeds of the
sale of the Fund's shares or of portfolio securities, (b) pending settlement
of purchases of portfolio securities and (c) to maintain liquidity for the
purpose of meeting anticipated redemptions.
In addition, the Fund may temporarily invest more than 20% of its total
assets in taxable securities, or in tax-exempt securities subject to the
federal alternative minimum tax for individual shareholders, in order to
maintain a "defensive" posture when, in the opinion of the Investment
Manager, it is advisable to do so because of market conditions. The types of
taxable money market instruments in which the Fund may invest are limited to
the following short-term fixed-income securities (maturing in one year or
less from the time of purchase): (i) obligations of the United States
Government, its agencies, instrumentalities or authorities; (ii) commercial
paper rated P-1 by Moody's Investors Service, Inc. ("Moody's") or A-1 by
Standard & Poor's Corporation ("S&P"); (iii) certificates of deposit of
domestic banks with assets of $1 billion or more; and (iv) repurchase
agreements with respect to the foregoing portfolio securities.
Tax-Exempt Securities. Under normal conditions, at least 80% of the total
assets of the Fund will be invested in securities, the interest on which is
exempt from federal income taxes. The tax-exempt securities in which the Fund
may invest include any or all of the following securities: fixed, variable,
or floating rate general obligation and revenue bonds (including municipal
lease obligations and resource recovery bonds); zero coupon and asset-backed
securities, inverse floaters; tax, revenue, or bond anticipation notes; and
tax-exempt commercial paper. In regard to the Moody's and S&P ratings
13
<PAGE>
discussed in the Prospectus, it should be noted that the ratings represent
the organizations' opinions as to the quality of the securities which they
undertake to rate and that the ratings are general and not absolute standards
of quality. For a description of municipal bond, municipal note and municipal
commercial paper ratings by Moody's and S&P, see the Appendix to this
Statement of Additional Information.
The percentage and rating policies in the Prospectus apply at the time of
acquisition of a security based upon the last previous determination of the
Fund's net asset value; any subsequent change in any ratings by a rating
service or change in percentages resulting from market fluctuations or other
changes in the amount of total assets will not require elimination of any
security from the Fund's portfolio until such time as the Investment Manager
determines that it is practicable to sell the security without undue market
or tax consequences to the Fund. Therefore, the Fund may hold securities
which have been downgraded to ratings of Ba or BB or lower by Moody's or S&P.
Such securities are considered to be speculative investments.
Although certain quality standards are applicable at the time of purchase,
the Fund does not have any minimum quality rating standard for its downgraded
investments. As such, the Fund may continue to hold securities rated as low
as Caa, Ca or C by Moody's or CCC, CC, C or CI by S&P. However, such
investments may not exceed more than 5% of the total assets of the Fund.
Bonds rated Caa or Ca by Moody's may already be in default on payment of
interest or principal, while bonds rated C by Moody's, their lowest bond
rating, can be regarded as having extremely poor prospects of ever attaining
any real investment standing. Bonds rated CI by S&P, their lowest Bond
rating, are no longer making interest payments.
The payment of principal and interest by issuers of certain municipal
securities purchased by the Fund may be guaranteed by letters of credit or
other credit facilities offered by banks or other financial institutions.
Such guarantees will be considered in determining whether municipal
securities meet the investment quality requirements of the Fund. In addition,
some issues may contain provisions which permit the Fund to demand from the
issuer repayment of principal at some specified period(s) prior to maturity.
Municipal Bonds. Municipal bonds, as referred to in the Prospectus, are
debt obligations of a state, its cities, municipalities and municipal
agencies (all of which are generally referred to as "municipalities") which
generally have a maturity at the time of issue of one year or more, and the
interest from which is, in the opinion of bond counsel to the issuer at time
of original issuance, exempt from regular federal income tax. These
obligations are issued to raise funds for various public purposes, such as
construction of a wide range of public facilities, to refund outstanding
obligations and to obtain funds for general operating expenses or to loan to
other public institutions and facilities. In addition, certain types of
industrial development bonds and pollution control bonds are issued by or on
behalf of public authorities to provide funding for various privately
operated facilities.
Municipal Notes. Municipal notes are short-term obligations of
municipalities, generally with a maturity at the time of issuance ranging
from six months to three years, the interest from which is, in the opinion of
bond counsel to the issuer at time of original issuance, exempt from regular
federal income tax. The principal types of municipal notes include tax
anticipation notes, bond anticipation notes, revenue anticipation notes and
project notes, although there are other types of municipal notes, in which
the Fund may invest. Notes sold in anticipation of collection of taxes, a
bond sale or receipt of other revenues are usually general obligations of the
issuing municipality or agency.
Municipal Commercial Paper. Municipal commercial paper refers to
short-term obligations of municipalities the interest from which is, in the
opinion of bond counsel to the issuer at time of original issuance, exempt
from regular federal income tax. Municipal commercial paper is likely to be
used to meet seasonal working capital needs of a municipality or interim
construction financing and to be paid from general revenues of the
municipality or refinanced with long-term debt. In most cases municipal
commercial paper is backed by letters of credit, lending agreements, note
repurchase agreements or other credit facility agreements offered by banks or
other institutions.
14
<PAGE>
The two principal classifications of municipal bonds, notes and commercial
paper are "general obligation" and "revenue" bonds, notes or commercial
paper. General obligation bonds, notes or commercial paper are secured by the
issuer's pledge of its faith, credit and taxing power for the payment of
principal and interest. Issuers of general obligation bonds, notes or
commercial paper include a state, its counties, cities, towns and other
governmental units. Revenue bonds, notes or commercial paper are payable from
the revenues derived from a particular facility or class of facilities or, in
some cases, from specific revenue sources. Revenue bonds, notes or commercial
paper are issued for a wide variety of purposes, including the financing of
electric, gas, water and sewer systems and other public utilities; industrial
development and pollution control facilities; single and multi-family housing
units; public buildings and facilities; air and marine ports; transportation
facilities such as toll roads, bridges and tunnels; and health and
educational facilities such as hospitals and dormitories. They rely primarily
on user fees to pay debt service, although the principal revenue source is
often supplemented by additional security features which are intended to
enhance the credit worthiness of the issuer's obligations. In some cases,
particularly revenue bonds issued to finance housing and public buildings, a
direct or implied "moral obligation" of a governmental unit may be pledged to
the payment of debt service. In other cases, a special tax or other charge
may augment user fees.
Issuers of municipal securities are subject to the provisions of
bankruptcy, insolvency and other laws affecting the rights and remedies of
creditors, such as the Federal Bankruptcy Act, and laws, if any, which may be
enacted by Congress or any state extending the time for payment of principal
or interest, or both, or imposing other constraints upon enforcement of such
obligations or upon municipalities to levy taxes. There is also the
possibility that as a result of litigation or other conditions the power or
ability of any one or more issuers to pay, when due, principal of and
interest on its, or their, municipal bonds, municipal notes and municipal
commercial paper may be materially affected.
Variable Rate Obligations. As stated in the Prospectus, the Fund may
invest in obligations of the type called "variable rate obligations." The
interest rate payable on a variable rate obligation is adjusted either at
predesignated periodic intervals or whenever there is a change in the market
rate of interest on which the interest rate payable is based. Other features
may include the right whereby the Fund may demand prepayment of the principal
amount of the obligation prior to its stated maturity (a "demand feature")
and the right of the issuer to prepay the principal amount prior to maturity.
The principal benefit of a variable rate obligation is that the interest rate
adjustment minimizes changes in the market value of the obligation. The
principal benefit to the Fund of purchasing obligations with a demand feature
is that liquidity, and the ability of the Fund to obtain repayment of the
full principal amount of the obligation prior to maturity, is enhanced.
Zero Coupon Securities. The Fund also may invest in zero coupon securities
which are debt securities issued or sold at a discount from their face value
which do not entitle the holder to any periodic payment of interest prior to
maturity or a specified redemption date (or cash payment date). The amount of
the discount varies depending on the time remaining until maturity or cash
payment date, prevailing interest rates, liquidity of the security and
perceived credit quality of the issuer. Zero coupon securities also may take
the form of debt securities that have been stripped of their unmatured
interest coupons, the coupons themselves and receipts or certificates
representing interests in such stripped debt obligations and coupons. The
market prices of zero coupon securities generally are more volatile than the
market prices of interest-bearing securities and are likely to respond to a
greater degree to changes in interest rates than interest-bearing securities
having similar maturities and credit qualities.
Lending of Portfolio Securities. The Fund may lend portfolio securities to
brokers, dealers and financial institutions provided that cash equal to at
least 100% of the market value of the securities loaned is deposited by the
borrower with the Fund and is maintained each business day in a segregated
account pursuant to applicable regulations. The collateral value of the
loaned securities will be marked-to-market daily. While such securities are
on loan, the borrower will pay the Fund any income accruing thereon, and the
Fund may invest the cash collateral in portfolio securities, thereby earning
additional income. The Fund will not lend the portfolio securities if such
loans are not permitted by the laws or regulations of any state in which its
shares are qualified for sale and will not lend more than 25% of the value of
the total assets of the Fund. Loans will be subject to termination by the
Fund, in the normal
15
<PAGE>
settlement time, currently five business days after notice, or by the
borrower on one day's notice. Borrowed securities must be returned when the
loan is terminated. Any gain or loss in the market price of the borrowed
securities which occurs during the term of the loan inures to the Fund and
its shareholders. The Fund may pay reasonable finders, borrowers,
administrative, and custodial fees in connection with a loan. The
creditworthiness of firms to which the Fund lends its portfolio securities
will be monitored on an ongoing basis. During the fiscal year ended March 31,
1998, the Fund did not loan any of its portfolio securities and it has no
current intention of doing so in the foreseeable future.
When-Issued and Delayed Delivery Securities and Forward Commitments. As
discussed in the Prospectus, from time to time, in the ordinary course of
business, the Fund may purchase securities on a when-issued or delayed
delivery basis and may purchase or sell securities on a forward commitment
basis. When such transactions are negotiated, the price is fixed at the time
of the commitment, but delivery and payment can take place a month or more
after the date of the commitment. The securities so purchased are subject to
market fluctuation and no interest accrues to the purchaser during this
period. While the Fund will only purchase securities on a when-issued,
delayed delivery or forward commitment basis with the intention of acquiring
the securities, the Fund may sell the securities before the settlement date,
if it is deemed advisable. At the time the Fund makes the commitment to
purchase securities on a when-issued or delayed delivery basis, the Fund will
record the transaction and thereafter reflect the value, each day, of such
security in determining the net asset value of the Fund. At the time of
delivery of the securities, the value may be more or less than the purchase
price. The Fund will also establish a segregated account with the Fund's
custodian bank in which it will continuously maintain cash or U.S. Government
securities or other high grade debt portfolio securities equal in value to
commitments for such when-issued or delayed delivery securities; subject to
this requirement, the Fund may purchase securities on such basis without
limit. An increase in the percentage of the Fund's assets committed to the
purchase of securities on a when-issued or delayed delivery basis may
increase the volatility of the Fund's net asset value.
When, As and If Issued Securities. As discussed in the Prospectus, the
Fund may purchase securities on a "when, as and if issued" basis under which
the issuance of the security depends upon the occurrence of a subsequent
event, such as approval of a merger, corporate reorganization, leveraged
buyout or debt restructuring. The commitment for the purchase of any such
security will not be recognized in the portfolio of the Fund until the
Investment Manager determines that issuance of the security is probable. At
such time, the Fund will record the transaction and, in determining its net
asset value, will reflect the value of the security daily. At such time, the
Fund will also establish a segregated account with its custodian bank in
which it will continuously maintain cash or U.S. Government securities or
other liquid portfolio securities equal in value to recognized commitments
for such securities. Settlement of the trade will occur within five business
days of the occurrence of the subsequent event. The value of the Fund's
commitments to purchase the securities of any one issuer, together with the
value of all securities of such issuer owned by the Fund, may not exceed 5%
of the value of the Fund's total assets of the time the initial commitment to
purchase such securities is made (see "Investment Restrictions"). Subject to
the foregoing restrictions, the Fund may purchase securities on such basis
without limit. An increase in the percentage of the Fund's assets committed
to the purchase of securities on a "when, as and if issued" basis may
increase the volatility of its net asset value. The Fund may also sell
securities on a "when, as and if issued" basis provided that the issuance of
the security will result automatically from the exchange or conversion of a
security owned by the Fund at the time of the sale.
Repurchase Agreements. When cash may be available for only a few days, it
may be invested by the Fund in repurchase agreements until such time as it
may otherwise be invested or used for payments of obligations of the Fund.
These agreements, which may be viewed as a type of secured lending by the
Fund, typically involve the acquisition by the Fund of debt securities from a
selling financial institution such as a bank, savings and loan association or
broker-dealer. The agreement provides that the Fund will sell back to the
institution, and that the institution will repurchase, the underlying
security ("collateral"), which is held by the Fund's Custodian at a specified
price and at a fixed time in the future which is usually not more than seven
days from the date of purchase. The Fund will receive interest from the
institution until the time when the repurchase is to occur. Although such
date is deemed by the Fund
16
<PAGE>
to be the maturity date of a repurchase agreement, the maturities of
securities subject to repurchase agreements are not subject to any limits and
may exceed one year. While repurchase agreements involve certain risks not
associated with direct investments in debt securities, the Fund follows
procedures designed to minimize such risks. These procedures include
effecting repurchase transactions only with large, well-capitalized, and
well-established financial institutions, whose financial condition will be
continually monitored. In addition, the value of the collateral underlying
the repurchase agreement will always be at least equal to the repurchase
price, including any accrued interest earned on the repurchase agreement. In
the event of a default or bankruptcy by a selling financial institution, the
Fund will seek to liquidate such collateral. However, the exercising of the
Fund's right to liquidate such collateral could involve certain costs or
delays and, to the extent that proceeds from any sale upon a default of the
obligation to repurchase were less than the repurchase price, the Fund could
suffer a loss. It is the current policy of the Fund not to invest in
repurchase agreements that do not mature within seven days if any such
investment, together with any other illiquid assets held by the Fund, amounts
to more than 15% of the net assets of the Fund. During the fiscal year ended
March 31, 1998, the Fund did not enter into repurchase agreements, and it is
the Fund's current intention not to invest in repurchase agreements in the
foreseeable future.
HEDGING ACTIVITIES
The Fund may enter into financial futures contracts, options on such
futures and municipal bond index futures contracts for hedging purposes.
FUTURES CONTRACT AND OPTIONS ON FUTURES
As discussed in the Prospectus, the Fund may invest in financial futures
contracts ("futures contracts") and related options thereon. These futures
contracts and related options thereon will be used only as a hedge against
anticipated interest rate changes. A futures contract sales creates an
obligation by the Fund, as seller to deliver the specific type of instrument
called for in the contract at a specified future time for a specified price.
A futures contract purchase would create an obligation by the Fund, as
purchaser to take delivery of the specific type of financial instrument at a
specified future time at a specified price. The specific securities delivered
or taken, respectively, at settlement date, would not be determined until or
near that date. The determination would be in accordance with the rules of
the exchange on which the futures contract sale or purchase was effected.
Although the terms of futures contracts specify actual delivery or receipt
of securities, in most instances the contracts are closed out before the
settlement date without the making or taking of delivery of the securities.
Closing out of a futures contract is usually effected by entering into an
offsetting transaction. An offsetting transaction for a futures contract sale
is effected by the Fund entering into a futures contract purchase for the
same aggregate amount of the specific type of financial instrument at the
same delivery date. If the price in the sale exceeds the price in the
offsetting purchase, the Fund is immediately paid the difference and thus
realizes a gain. If the offsetting purchase price exceeds the sale price, the
Fund pays the difference and realizes the loss. Similarly, the closing out of
a futures contract purchase is effected by the Fund entering into a futures
contract sale. If the offsetting sale price exceeds the purchase price, the
Fund realizes a gain, and if the offsetting sale price is less than the
purchase price, the Fund realizes a loss.
Unlike a futures contract which requires the parties to buy and sell a
security on a set date, an option on a futures contract entitles its holder
to decide on or before a future date whether to enter into such a contract.
If the holder decides not to enter into the contract, the premium paid for
the option is lost. Since the value of the option is fixed at the point of
sale, there are no daily payments of cash to reflect the change in the value
of the underlying contract, as discussed below for futures contracts. The
value of the option changes and is reflected in the net asset value of the
Fund.
The Fund is required to maintain margin deposits with brokerage firms
through which it effects futures contracts and options thereon. The initial
margin requirements vary according to the type of the underlying security. In
addition, due to current industry practice daily variations in gains and
losses on
17
<PAGE>
open contracts are required to be reflected in cash in the form of variation
margin payments. The Fund may be required to make additional margin payments
during the term of the contract.
Currently, futures contracts can be purchased on debt securities such as
U.S. Treasury Bills and Bonds, U.S. Treasury Notes with maturities between 6
1/2 and 10 years, Certificates of the Government National Mortgage
Association and Bank Certificates of Deposit. The Fund may invest in interest
rate futures contracts covering these types of financial instruments as well
as in new types of contracts that become available in the future.
Financial futures contracts are traded in an auction environment on the
floors of several Exchanges -principally, the Chicago Board of Trade, the
Chicago Mercantile Exchange and the New York Futures Exchange. Each Exchange
guarantees performance under contract provisions through a clearing
corporation, a nonprofit organization managed by the Exchange membership
which is also responsible for handling daily accounting of deposits or
withdrawals of margin.
A risk in employing futures contracts to protect against the price
volatility of portfolio securities is that the prices of securities subject
to futures contracts may correlate imperfectly with the behavior of the cash
prices of the Funds' portfolio securities. The correlation may be distorted
by the fact that the futures market is dominated by short-term traders
seeking to profit from the difference between a contract or security price
objective and their cost of borrowed funds. This would reduce their value for
hedging purposes over a short time period. The correlation may be further
distorted since the futures contracts that are being used to hedge are not
based on municipal obligations.
Another risk is that the Fund's Investment Manager could be incorrect in
its expectations as to the direction or extent of various interest rate
movements or the time span within which the movements take place. For
example, if the Fund sold futures contracts for the sale of securities in
anticipation of an increase in interest rates, and then interest rates went
down instead, causing bond prices to rise, the Fund would lose money on the
sale.
Put and call options on financial futures have similar characteristics as
Exchange-traded options. See below for a further description of options.
In addition to the risks associated in investing in options on securities,
there are particular risks associated with investing in options on futures.
In particular, the ability to establish and close out positions on such
options will be subject to the development and maintenance of a liquid
secondary market. It is not certain that this market will develop.
In order to assure that the Fund is utilizing futures transactions for
hedging purposes only, a substantial majority (i.e., approximately 75%) of
all anticipatory hedge transactions of the Fund (transactions in which the
Fund does not own at the time of the transaction, but expects to acquire, the
securities underlying the relevant futures contract) involving the purchase
of futures contracts or call options thereon will be completed by the
purchase of securities which are the subject of the hedge.
The Fund may not enter into futures contracts or related options thereon
if immediately thereafter the amount committed to margin of all the Funds'
futures contracts plus the amount paid for option premiums exceeds 5% of the
value of the Fund's total assets. In instances involving the purchase of
futures contracts by the Fund the market value of the futures contract will
be deposited in a segregated account containing cash and cash equivalents to
collateralize the position and thereby ensure that the use of such futures is
unleveraged. The Fund may not purchase or sell futures contracts or related
options thereon if, immediately thereafter, more than one-third of the Fund's
net assets would be hedged.
Municipal Bond Index Futures. The Fund may utilize municipal bond index
futures contracts for hedging purposes. The Fund's strategies in employing
such contracts will be similar to that discussed above with respect to
financial futures and options thereon. A municipal bond index is a method of
reflecting in a single number the market value of many different municipal
bonds and is designed to be representative of the municipal bond market
generally. The index fluctuates in response to changes in the market values
of the bonds included within the index. Unlike futures contracts on
particular financial instruments, transactions in futures on a municipal bond
index will be settled in cash if held until the close
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of trading in the contract. However, like any other futures contract, a
position in the contract may be closed out by purchase or sale of an
offsetting contract for the same delivery month prior to expiration of the
contract. The Fund's ability to utilize such contracts will be dependent upon
the development and maintenance of a liquid secondary market for such
contracts.
Options. The Fund may purchase or sell (write) options on debt securities
as a means of achieving additional return or hedging the value of the Fund's
portfolio. The Fund would only buy options listed on national securities
exchanges. The Fund, will not purchase options if, as a result, the aggregate
cost of all outstanding options exceeds 10% of the Fund's total assets.
A call option is a contract that gives the holder of the option the right
to buy from the writer of the call option, in return for a premium, the
security underlying the option at a specified exercise price at any time
during the term of the option. The writer of the call option has the
obligation upon exercise of the option to deliver the underlying security
upon payment of the exercise price during the option period. A put option is
a contract that gives the holder of the option the right to sell to the
writer, in return for a premium, the underlying security at a specified price
during the term of the option. The writer of the put has the obligation to
buy the underlying security upon exercise, at the exercise price during the
option period.
The Fund will only write covered call or covered put options. The Fund may
not write covered options in an amount exceeding 10% of the value of the
total assets of the Fund. A call option is "covered" if the Fund owns the
underlying security subject to the option or has an absolute and immediate
right to acquire that security or futures contract without additional cash
consideration (or for additional cash consideration held in a segregated
account by its custodian) upon conversion or exchange of other securities
held in its portfolio. A call option is also covered if the Fund holds a call
on the same security or futures contract as the call written where the
exercise price of the call held is (i) equal to or less than the exercise
price of the call written or (ii) greater than the exercise price of the call
written if the difference is maintained by the Fund in cash, Treasury bills
or other high grade short-term debt obligations in a segregated account with
its custodian. A put option is "covered" if the Fund maintains cash, Treasury
bills or other liquid portfolio securities with a value equal to the exercise
price in a segregated account with its custodian, or else holds a put on the
same security or futures contract as the put written where the exercise price
of the put held is equal to or greater than the exercise price of the put
written.
If the Fund has written an option it may terminate its obligation by
effecting a closing purchase transaction. This is accomplished by purchasing
an option of the same series as the option previously written. However, once
the Fund has been assigned an exercise notice, the Fund will be unable to
effect a closing purchase transaction. Similarly, if the Fund is the holder
of an option it may liquidate its position by effecting a closing sale
transaction. This is accomplished by selling an option of the same series as
the option previously purchased. There can be no assurance that either a
closing purchase or sale transaction can be effected when the Fund so
desires.
The Fund will realize a profit from a closing transaction if the price of
the transaction is less than the premium received from writing the option or
is more than the premium paid to purchase the option; the Fund, will realize
a loss from a closing transaction if the price of the transaction is more
than the premium received from writing the option or is less than the premium
paid to purchase the option. Since call option prices generally reflect
increases in the price of the underlying security, any loss resulting from
the repurchase of a call option may also be wholly or partially offset by
unrealized appreciation of the underlying security. Other principal factors
affecting the market value of a put or a call option include supply and
demand, interest rates, the current market price and price volatility of the
underlying security and the time remaining until the expiration date.
An option position may be closed out only on an exchange which provides a
secondary market for an option of the same series. Although the Fund will
generally purchase or write only those options for which there appears to be
an active secondary market, there is no assurance that a liquid secondary
market on an exchange will exist for any particular option. In such event it
might not be possible to effect closing transactions in particular options,
so that the Fund would have to exercise its options in order to
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realize any profit and would incur brokerage commissions upon the exercise of
call options and upon the subsequent disposition of underlying securities for
the exercise of put options. If the Fund as a covered call option writer is
unable to effect a closing purchase transaction in a secondary market, it
will not be able to sell the underlying security until the option expires or
it delivers the underlying security upon exercise.
PORTFOLIO MANAGEMENT
The Fund's portfolio turnover rate during the fiscal year ended March 31,
1998 was 0%. It is anticipated that the Fund's portfolio turnover rate will
not exceed 50% during the fiscal year ending March 31, 1999. A 50% turnover
rate would occur, for example, if 50% of the securities held in the Fund's
portfolio (excluding all securities whose maturities at acquisition were one
year or less) were sold and replaced within one year. However, the Fund may
engage in short-term trading consistent with its investment objective.
Securities may be sold in anticipation of a market decline (a rise in
interest rates) or purchased in anticipation of a market rise (a decline in
interest rates). In addition, a security may be sold and another security of
comparable quality purchased at approximately the same time to take advantage
of what the Investment Manager believes to be a temporary disparity in the
normal yield relationship between the two securities. These yield disparities
may occur for reasons not directly related to the investment quality of
particular issues or the general movement of interest rates, such as changes
in the overall demand for, or supply of, various types of tax-exempt
securities.
In general, purchases and sales may also be made to restructure the
portfolio in terms of average maturity, quality, coupon yield, or
diversification for any one or more of the following purposes: (a) to
increase income, (b) to improve portfolio quality, (c) to minimize capital
depreciation, (d) to realize gains or losses, or for such other reasons as
the Investment Manager deems relevant in light of economic and market
conditions.
The Fund does not generally intend to invest more than 25% of its total
assets in securities of any one governmental unit. Subject to investment
restriction number 3 in the Prospectus, the Fund may invest more than 25% of
the total assets in private activity bonds (a certain type of tax-exempt
municipal security).
The Fund may invest up to 15% of its net assets in obligations customarily
sold to institutional investors in private transactions with the issuers
thereof and other securities which may be deemed to be illiquid. Due to the
limited market for certain of these securities, the Fund may be unable to
dispose of such securities promptly at reasonable prices. It is the current
intention of the Fund not to invest in such obligations.
LOCAL GOVERNMENTAL UNIT AND RELATED AUTHORITY OBLIGATIONS
Various state statutes authorize local units of government (counties,
cities, school districts and the like) to issue general obligations and
revenue obligations, subject to compliance with the requirements of such
statutes. In addition, various statutes permit local government units to
organize authorities having the power to issue obligations which are not
subject to debt limits that may be applicable to the organizing governmental
unit and which are payable from assets of or revenues derived from projects
financed by such authorities. Such authorities include parking authorities,
industrial development authorities, redevelopment authorities, transportation
authorities, water and sewer authorities, and authorities to undertake
projects for institutions of higher education and health care. Such
obligations may generally be affected by adverse changes in the economy of
the area in which such local government units or projects financed by them or
by authorities created by them are located, by changes in applicable federal,
state or local law or regulation, or by changes in levels of federal, state
or local appropriations, grants or subsidies to the extent such
appropriations, grants or subsidies directly or indirectly affect revenues of
such issuers.
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INVESTMENT RESTRICTIONS
- -----------------------------------------------------------------------------
In addition to the investment restrictions enumerated in the Prospectus,
the investment restrictions listed below have been adopted by the Fund as
fundamental policies, which may not be changed without the vote of a majority
of the outstanding voting securities as defined in the Act. Such a majority
is defined as the lesser of (a) 67% of the shares of the Fund present at a
meeting of shareholders, if the holders of more than 50% of the outstanding
shares of the Fund are present or represented by proxy or (b) more than 50%
of the outstanding shares of the Fund. For purposes of the following
restrictions and those recited in the Prospectus: (a) an "issuer" of a
security is the entity whose assets and revenues are committed to the payment
of interest and principal on that particular security, provided that the
securities guaranteed by separate entities will be considered a separate
security and provided further that a guarantee of a security shall not be
deemed to be a security issued by the guarantor if the value of all
securities issued or guaranteed by the guarantor and owned by the Fund does
not exceed 10% of the value of the total assets of the Fund; (b) a "taxable
security" is any security the interest on which is subject to regular federal
income tax; and (c) all percentage limitations apply immediately after a
purchase or initial investment, and any subsequent change in any applicable
percentage resulting from market fluctuations or other changes in total or
net assets does not require elimination of any security from the portfolio.
The Fund may not:
1. Invest in common stock.
2. Invest in securities of any issuer if, to the knowledge of the Fund,
any officer or trustee of the Fund or any officer or director of the
Investment Manager owns more than 1/2 of 1% of the outstanding securities of
such issuer, and such officers, trustees and directors who own more than 1/2
of 1% own in the aggregate more than 5% of the outstanding securities of
such issuer.
3. Purchase or sell real estate or interests therein (including limited
partnership interests), although it may purchase securities secured by real
estate or interests therein.
4. Purchase or sell commodities except that the Fund may purchase
financial futures contracts and related options in accordance with
procedures adopted by the Trustees described in its Prospectus and Statement
of Additional Information.
5. Purchase oil, gas or other mineral leases, rights or royalty
contracts, or exploration or development programs.
6. Write, purchase or sell puts, calls, or combinations thereof, except
options on futures contracts or options on debt securities.
7. Purchase securities of other investment companies, except in
connection with a merger, consolidation, reorganization or acquisition of
assets.
8. Borrow money, except that the Fund may borrow from a bank for
temporary or emergency purposes in amounts up to 5% (taken at the lower of
cost or current value) of the value of the total assets of the Fund
(including the amount borrowed) less its liabilities (not including any
borrowings but including the fair market value at the time of computation of
any senior securities then outstanding).
9. Pledge its assets or assign or otherwise encumber them except to
secure permitted borrowings. (For the purpose of this restriction,
collateral arrangements with respect to the writing of options and
collateral arrangements with respect to initial margin for futures are not
deemed to be pledges of assets and neither such arrangements nor the
purchase or sale of futures are deemed to be the issuance of a senior
security as set forth in restriction 10.)
10. Issue senior securities as defined in the Act except insofar as the
Fund may be deemed to have issued a senior security by reason of: (a)
entering into any repurchase agreement; (b) purchasing any securities on a
when-issued or delayed delivery basis; or (c) borrowing money in accordance
with restrictions described above.
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11. Make loans of money or securities, except: (a) by the purchase of
debt obligations in which the Fund may invest consistent with its investment
objective and policies; (b) by investment in repurchase agreements; and (c)
by lending its portfolio securities.
12. Make short sales of securities.
13. Purchase securities on margin, except for such short-term loans as
are necessary for the clearance of purchases of portfolio securities. The
deposit or payment by the Fund of initial or variation margin in connection
with futures contracts or related options thereon is not considered the
purchase of a security on margin.
14. Engage in the underwriting of securities, except insofar as the Fund
may be deemed an underwriter under the Securities Act of 1933 in disposing
of a portfolio security.
15. Invest for the purpose of exercising control or management of any
other issuer.
16. Invest more than 5% of the value of its total assets in securities of
issuers having a record, together with predecessors, of less than three
years of continuing operation. This restriction does not apply to
obligations issued or guaranteed by the United States Government, its
agencies or instrumentalities.
Notwithstanding any other investment policy or restriction, the Fund may
seek to achieve its investment objective by investing all or substantially
all of its assets in another investment company having substantially the same
investment objective and policies as the Fund.
PORTFOLIO TRANSACTIONS AND BROKERAGE
- -----------------------------------------------------------------------------
The Investment Manager is responsible for decisions to buy and sell
securities and commodities for the Fund, the selection of brokers and dealers
to effect the transactions, and the negotiation of brokerage commissions, if
any. The Fund expects that the primary market for the securities in which it
intends to invest will generally be the over-the-counter market. Securities
are generally traded in the over-the-counter market on a "net" basis with
dealers acting as principal for their own accounts without charging a stated
commission, although the price of the security usually includes a profit to
the dealer. Options and futures transactions will usually be effected through
a broker and a commission will be charged. The Fund also expects that
securities will be purchased at times in underwritten offerings where the
price includes a fixed amount of compensation, generally referred to as the
underwriter's concession or discount. On occasion, the Fund may also purchase
certain money market instruments directly from an issuer, in which case no
commissions or discounts are paid. During the fiscal years ended March 31,
1996, 1997 and 1998, the Fund did not pay any brokerage commissions.
The Investment Manager currently serves as investment manager or adviser
to a number of clients, including other investment companies, and may in the
future act as investment manager or adviser to others. It is the practice of
the Investment Manager to cause purchase and sale transactions to be
allocated among the Fund and others whose assets it manages in such manner as
it deems equitable. In making such allocations among the Fund and other
client accounts, various factors may be considered, including the respective
investment objectives, the relative size of portfolio holdings of the same or
comparable securities, the availability of cash for investment, the size of
investment commitments generally held and the opinion of the persons
responsible for managing the porfolios of the Fund and other client accounts.
In the case of certain initial and secondary public offerings, the Investment
Manager utilizes a pro rata allocation process based on the size of the
Morgan Stanley Dean Witter Funds involved and the number of shares available
from the public offering.
The policy of the Fund, regarding purchases and sales of securities is
that primary consideration be given to obtaining the most favorable prices
and efficient execution of transactions. In seeking to implement the Fund's
policies, the Investment Manager effects transactions with those brokers and
dealers who the Investment Manager believes provide the most favorable prices
and are capable of providing efficient executions. If the Investment Manager
believes such price and executions are obtainable from more than one broker
or dealer, it may give consideration to placing portfolio
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<PAGE>
transactions with those brokers and dealers who also furnish research and
other services to the Fund or the Investment Manager. Although the Fund may
purchase securities from brokers or dealers acting as principal, who also
provide research for the advisor, it will not pay a mark-up in consideration
for such services. Such services may include, but are not limited to, any one
or more of the following: information as to the availability of securities
for purchase or sale; statistical or factual information or opinions
pertaining to investment; wire services; and appraisals or evaluations of
portfolio securities.
The information and services received by the Investment Manager from
brokers and dealers may be of benefit to the Investment Manager in the
management of accounts of some of its other clients and may not, in every
case, benefit the Fund directly. While the receipt of such information and
services is useful in varying degrees and would generally reduce the amount
of research or services otherwise performed by the Investment Manager and
thereby reduce its expenses, it is of indeterminable value and the Fund will
not reduce the management fee it pays to the Investment Manager by any amount
that may be attributable to the value of such services.
Pursuant to an order of the Securities and Exchange Commission, the Fund
may effect principal transactions in certain money market instruments with
DWR. The Fund will limit its transactions with DWR to U.S. Government and
Government Agency Securities, Bank Money Instruments (i.e., Certificates of
Deposit and Bankers' Acceptances) and Commercial Paper. Such transactions
will be effected with DWR only when the price available from DWR is better
than that available from other dealers.
Consistent with the policy described above, brokerage transactions in
securities and commodities listed on exchanges or admitted to unlisted
trading privileges may be effected through DWR, Morgan Stanley & Co.
Incorporated ("MS & Co.") and other affiliated brokers and dealers. In order
for an affiliated broker or dealer to effect portfolio transactions for the
Fund, the commissions, fees or other remuneration received by DWR and MS &
Co. must be reasonable and fair compared to the commissions, fees or other
remuneration paid to other brokers in connection with comparable transactions
involving similar securities being purchased or sold on an exchange during a
comparable period of time. This standard would allow the affiliated broker or
dealer to receive no more than the remuneration which would be expected to be
received by an unaffiliated broker in a commensurate arms-length transaction.
Furthermore, the Trustees of the Fund, including a majority of the Trustees
who are not "interested" Trustees, have adopted procedures which are
reasonably designed to provide that any commissions, fees or other
remuneration paid to an affiliated broker or dealer are consistent with the
foregoing standard. During the fiscal years ended March 31, 1996, 1997 and
1998, the Fund paid no brokerage commissions to DWR. During the period June
1, 1997 through April 30, 1998, the Fund paid no brokerage commissions to MS
& Co., which broker-dealer became an affiliate of the Investment Manager on
May 31, 1997 upon consummation of the merger of Dean Witter, Discover & Co.
with Morgan Stanley Group Inc.
PURCHASE OF FUND SHARES
- -----------------------------------------------------------------------------
As discussed in the Prospectus, the Fund offers its shares for sale to the
public through Morgan Stanley Dean Witter Distributors Inc. (the
"Distributor") on a continous basis at an offering price equal to the net
asset value per share next determined following receipt of any order without
a sales charge. (See the Prospectus -- "Purchase of Fund Shares.") The
Distributor has entered into selected broker-dealer agreements with DWR and
other selected dealers ("Selected Broker-Dealers") pursuant to which shares
of the Fund are sold. The Distributor, a Delaware corporation, is a
wholly-owned subsidiary of MSDW. The Trustees who are not, and were not at
the time they voted, interested persons of the Fund, as defined in the Act
(the "Independent Trustees"), approved, at their meeting held on April 24,
1997, the current Distribution Agreement appointing the Distributor as
exclusive distributor of the Fund's shares and providing for the Distributor
to bear distribution expenses not borne by the Fund. By its terms, the
Distribution Agreement has an initial term ending April 30, 1998, and will
remain in effect from year to year thereafter if approved by the Board. At
their meeting held on April 30, 1998, the Trustees of the Fund, including a
majority of the Independent Trustees, approved the continuation of the
Distribution Agreement. The Distribution Agreement took effect on May 31,
1997 upon the consummation
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<PAGE>
of the merger of Dean Witter, Discover & Co. with Morgan Stanley Group Inc.
and is substantially identical to the Fund's previous Distribution Agreement
except for its dates of effectiveness and termination.
The Distributor bears all expenses it may incur in providing services
under the Distribution Agreement. Such expenses include the payment of
commissions for sales of the Fund's shares and incentive compensation to
Morgan Stanley Dean Witter Financial Advisors and other Selected
Broker-Dealer representatives. The Distributor will also pay certain expenses
in connection with the distribution of the shares of the Fund, including the
costs of preparing, printing and distributing advertising or promotional
materials, and the costs of printing and distributing prospectuses and
supplements thereto used in connection with the offering and sale of the
Fund's shares. The Fund bears the costs of initial typesetting, printing and
distribution of prospectuses and supplements thereto to shareholders. The
Fund also will bear the costs of registering the Fund and its shares under
federal and state securities laws. The Fund and the Distributor have agreed
to indemnify each other against certain liabilities, including liabilities
under the Securities Act of 1933, as amended. Under the Distribution
Agreement, the Distributor uses its best efforts in rendering services to the
Fund, but in the absence of willful misfeasance, bad faith, gross negligence
or reckless disregard of its obligations, the Distributor is not liable to
the Fund or any of its shareholders for any error of judgment or mistake of
law or for any act or omission or for any losses sustained by the Fund or its
shareholders.
PLAN OF DISTRIBUTION
The Fund has adopted a Plan of Distribution pursuant to Rule 12b-1 under
the Act (the "Plan") whereby the Distributor or any of its affiliates,
including MSDW Advisors, is authorized to utilize their own resources to
finance certain activities in connection with the distribution of shares of
the Fund. The Plan was approved initially by the Trustees on June 3, 1993,
and by MSDW Advisors as the Fund's then sole shareholder on June 25, 1993,
whereupon the Plan went into effect. The vote of the Trustees, which was cast
in person at a meeting called for the purpose of voting on such Plan,
included a majority of the Trustees who are not and were not at the time of
their voting interested persons of the Fund and who have and had at the time
of their votes no direct or indirect financial interest in the operation of
the Plan (the "Independent 12b-1 Trustees"). In making their decision to
adopt the Plan, the Trustees requested from the Distributor and received such
information as they deemed necessary to make an informed determination as to
whether or not adoption of the Plan was in the best interests of the
shareholders of the Fund. After due consideration of the information
received, the Trustees, including the Independent 12b-1 Trustees, determined
that adoption of the Plan would benefit the shareholders of the Fund.
The Plan provides that the Fund authorizes the Distributor or any of its
affiliates, including MSDW Advisors, to bear the expense of all promotional
and distribution related activities on behalf of the Fund. Among the
activities and services which may be provided under the Plan are: (1)
compensation to and expenses of Morgan Stanley Dean Witter Financial Advisors
and other Selected Broker-Dealer representatives and other employees of the
Distributor and Selected Broker-Dealers, including overhead and telephone
expenses; (2) sales incentives and bonuses to sales representatives and to
marketing personnel in connection with promoting sales of the Fund's shares;
(3) expenses incurred in connection with promoting sales of the Fund's
shares; (4) preparing and distributing sales literature; and (5) providing
advertising and promotional activities, including direct mail solicitation
and television, radio, newspaper, magazine and other media advertisements.
Pursuant to the Selected Broker-Dealer Agreements between the Distributor
and DWR and other Selected Broker-Dealers, the Morgan Stanley Dean Witter
Financial Advisors and other Selected Broker-Dealer representatives may be
paid an annual fee based upon the current value of the respective accounts
for which they are the Financial Advisors or representatives of record. The
fee also reflects a payment made for expenses associated with the servicing
of shareholder's accounts, including the expenses of operating branch offices
in connection with the servicing of shareholder's accounts, which expenses
include lease costs, the salaries and employee benefits of operations and
sales support personnel, utility costs, communications costs and the costs of
stationery and supplies and other expenses relating to branch office
servicing of shareholder accounts.
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<PAGE>
Under the Plan, the Distributor uses its best efforts in rendering
services to the Fund, but in the absence of willful misfeasance, bad faith,
gross negligence or reckless disregard of its obligations, the Distributor is
not liable to the Fund or any of its shareholders for any error of judgment
or mistake of law or for any act or omission or for any losses sustained by
the Fund or its shareholders.
At their meeting held April 30, 1998, the Trustees of the Fund, including
all of the Independent 12b-1 Trustees approved the continuance of the Plan.
The Plan will remain in effect until April 30, 1999, and from year to year
thereafter will continue in effect, provided such continuance is approved
annually by a vote of the Trustees, including a majority of the Independent
12b-1 Trustees. Assumption by the Fund of any distribution expenses under the
Plan must be approved by the shareholders, and all material amendments to the
Plan must be approved by the Trustees in the manner described above. The Plan
may be terminated at any time, without payment of any penalty, by vote of the
holders of a majority of the Independent 12b-1 Trustees or by a vote of a
majority of the outstanding voting securities (as defined in the Act) on not
more than 30 days' written notice to any other party to the Plan. So long as
the Plan is in effect, the selection or nomination of the Independent 12b-1
Trustees is committed to the discretion of the Independent 12b-1 Trustees.
Under the Plan, the Distributor provides the Fund, for review by the
Trustees, and the Trustees review, promptly after the end of each fiscal
quarter, a written report regarding the distribution expenses incurred by the
Distributor of the Fund during such fiscal quarter, which report includes (1)
an itemization of the types of expenses and the purposes therefor; (2) the
amounts of such expenses; and (3) a description of the benefits derived by
the Fund. In the Trustees' quarterly review of the Plan they will consider
its continued appropriateness and the level of compensation provided therein.
No interested person of the Fund nor any Trustee of the Fund who is not an
interested person of the Fund, as defined in the Act, has any direct or
indirect financial interest in the operation of the Plan except to the extent
that the Distributor, MSDW Advisors, MSDW Services, DWR or certain of its
employees may be deemed to have such an interest as a result of benefits
derived from the successful operation of the Plan or as a result of receiving
a portion of the amounts expended thereunder by the Distributor or any of its
affiliates, including MSDW Advisors.
DETERMINATION OF NET ASSET VALUE
As discussed in the Prospectus, portfolio securities (other than
short-term debt securities and futures and options) are valued for the Fund
by an outside independent pricing service approved by the Trustees. The
pricing service has informed the Fund that in valuing the portfolio
securities, it uses both a computerized grid matrix of tax-exempt securities
and evaluations by its staff, in each case based on information concerning
market transactions and quotations from dealers which reflect the bid side of
the market each day. The portfolio securities are thus valued for the Fund by
reference to a combination of transactions and quotations for the same or
other securities believed to be comparable in quality, coupon, maturity, type
of issue, call provisions, trading characteristics and other features deemed
to be relevant. The Trustees believe that timely and reliable market
quotations are generally not readily available to the Fund for purposes of
valuing tax-exempt securities and that the valuations supplied by the pricing
service, using the procedures outlined above and subject to periodic review,
are more likely to approximate the fair value of such securities. Short-term
taxable debt securities with remaining maturities of 60 days or less at the
time of purchase are valued at amortized cost, unless the Trustees determine
such does not reflect the securities' fair value, in which case these
securities will be valued at their fair value as determined by the Trustees.
Other short-term taxable debt securities will be valued on a mark to market
basis until such time as they reach a remaining maturity of 60 days,
whereupon they will be valued at amortized cost using their value on the 61st
day unless the Trustees determine such does not reflect the securities' fair
value, in which case these securities will be valued at their fair value as
determined by the Trustees. Listed options are valued at the latest sale
price on the exchange on which they are listed unless no sales of such
options have taken place that day, in which case they will be valued at the
mean between their latest bid and asked prices. Unlisted options are valued
at the mean between their latest bid and asked prices. Futures are valued at
the latest sale price as of the close of the commodities exchange on which
they trade unless the Trustees determine that such price does not
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reflect their fair value, in which case they will be valued at their fair
value as determined by the Trustees. All other securities, including illiquid
securities, and other assets are valued at their fair value as determined in
good faith under procedures established by and under the supervision of the
Trustees.
The net asset value per share will be determined once daily at 4:00 p.m.
New York time (or, on days when the New York Stock Exchange closes prior to
4:00 p.m., at such earlier time) on each day that the New York Stock Exchange
is open. The New York Stock Exchange currently observes the following
holidays: New Year's Day; Reverend Dr. Martin Luther King, Jr. Day;
Presidents' Day; Good Friday; Memorial Day; Independence Day; Labor Day;
Thanksgiving Day; and Christmas Day.
SHAREHOLDER SERVICES
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Upon the purchase of shares of the Fund, a Shareholder Investment Account
is opened for the investor on the books of the Fund and maintained by the
Fund's Transfer Agent, Morgan Stanley Dean Witter Trust FSB (the "Transfer
Agent"). This is an open account in which shares owned by the investor are
credited by the Transfer Agent in lieu of issuance of a share certificate. If
a share certificate is desired, it must be requested in writing for each
transaction. Certificates are issued only for full shares and may be
redeposited in the account at any time. There is no charge to the investor
for issuance of a certificate. Whenever a shareholder instituted transaction
takes place in the Shareholder Investment Account, the shareholder will be
mailed a confirmation of the transaction from the Fund or from DWR or another
Selected Broker-Dealer.
Automatic Investment of Dividends and Distributions. Each purchase of
shares of the Fund is made upon the condition that the Transfer Agent is
thereby automatically appointed as agent of the investor to receive all
dividends and distributions on shares owned by the investor. Such dividends
and distributions will be paid on the monthly payment date, which will be no
later than the last business day of the month for which the dividend or
distribution is payable in shares of the Fund at net asset value per share.
Processing of dividend or distribution checks begins immediately following
the monthly payment date. Shareholders who have requested to receive
dividends in cash will normally be sent their monthly dividend check during
the first ten days of the following month. At any time an investor may
request the Transfer Agent in writing to have subsequent dividends and/or
capital gains distributions paid to the investor in cash rather than shares.
In order to provide sufficient time to process the change, such requests must
be received by the Transfer Agent at least five business days prior to the
payment date of the dividend or the record date of the distribution. In case
of recently purchased shares for which registration instructions have not
been received on the payment or record date, cash payments will be made to
the Distributor or the dealer through whom shares were purchased which
payments will be forwarded to the shareholder, upon receipt of proper
instructions. It has been and remains the Fund's policy and practice that, if
checks for dividends or distributions paid in cash remain uncashed, no
interest will accrue on amounts represented by such uncashed checks.
EasyInvest (Service Mark) . Shareholders may subscribe to EasyInvest, an
automatic purchase plan which provides for any amount from $100 to $5,000 to
be transferred automatically from a checking or savings account or following
redemption of shares of a Morgan Stanley Dean Witter money market fund, on a
semi-monthly, monthly or quarterly basis, to the Transfer Agent for
investment in shares of the Fund. Shares purchased through EasyInvest will be
added to the shareholder's existing account at the net asset value calculated
the same business day the transfer of funds is effected. Shares of the Morgan
Stanley Dean Witter money market funds redeemed in connection with EasyInvest
are redeemed on the business day preceding the transfer of funds. For further
information or to subscribe to EasyInvest, shareholders should contact their
Morgan Stanley Dean Witter Financial Advisor or other Selected Broker-Dealer
representative or the Transfer Agent.
Systematic Withdrawal Plan. As discussed in the Prospectus, a withdrawal
plan is available for shareholders who own or purchase shares of the Fund
having a minimum value of $10,000 based upon the then current offering price.
The plan provides for monthly or quarterly (March, June, September and
December) checks in any dollar amount, not less than $25, or in any whole
percentage of the account balance, on an annualized basis.
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Dividends and capital gains distributions on shares held under the
Systematic Withdrawal Plan will be invested in additional full and fractional
shares at net asset value (without a sales charge). Shares will be credited
to an open account for the investor by the Transfer Agent; no share
certificates will be issued. A shareholder is entitled to a share certificate
upon written request to the Transfer Agent, although in that event the
shareholder's Systematic Withdrawal Plan will be terminated.
The Transfer Agent acts as agent for the shareholder in tendering to the
Fund for redemption sufficient full and fractional shares to provide the
amount of the periodic withdrawal payment designated in the application. The
shares will be redeemed at their net asset value determined, at the
shareholder's option on the tenth or twenty-fifth day (or next following
business day) of the relevant month or quarter and normally a check for the
proceeds will be mailed by the Transfer Agent, or amounts credited to a
shareholder's DWR or other selected broker-dealer brokerage account within
five business days after the date of redemption. The Withdrawal Plan may be
terminated at any time by the Fund.
Withdrawal Plan payments should not be considered as dividends, yields or
income. If periodic withdrawal plan payments continuously exceed net
investment income and net capital gains, the shareholder's original
investment will be correspondingly reduced and ultimately exhausted. Each
withdrawal constitutes a redemption of shares and any gain or loss realized
must be recognized for federal income tax purposes.
Any shareholder who wishes to have payments under the Withdrawal Plan made
to a third party or sent to an address other than the one listed on the
account must send complete written instructions to the Transfer Agent to
enroll in the Withdrawal Plan. The shareholder's signature on such
instructions must be guaranteed by an eligible guarantor acceptable to the
Transfer Agent (shareholders should contact the Transfer Agent for a
determination as to whether a particular institution is such an eligible
guarantor). A shareholder may, at any time change the amount and interval of
withdrawal payments and the address to which checks are mailed through his or
her account executive or by written notification to the Transfer Agent. The
shareholder's signature on such notification must be guaranteed by an
eligible guarantor as described above. The shareholder may also terminate the
Systematic Withdrawal Plan at any time by written notice to the Transfer
Agent. In the event of such termination, the account will becontinued as a
Shareholder Investment Account. The shareholder may also redeem all or part
of the shares held in the Systematic Withdrawal Plan account (see
"Redemptions and Repurchases" in the Prospectus) at any time. Shareholders
wishing to enroll in the Withdrawal Plan should contact their account
executive or the Transfer Agent.
Targeted Dividends (Service Mark) . In states where it is legally
permissible, shareholders may also have all income dividends and capital
gains distributions automatically invested in shares of any open-end Morgan
Stanley Dean Witter Fund other than Morgan Stanley Dean Witter Limited Term
Municipal Trust. Such investment will be made at the net asset value per
share (without sales charge) of the selected Morgan Stanley Dean Witter Fund
as of the close of business on the payment date of the dividend or
distribution, and will begin to earn dividends, if any, in the selected
Morgan Stanley Dean Witter Fund the next business day. Shareholders of the
Fund must be shareholders of the Morgan Stanley Dean Witter Fund targeted to
receive investments from dividends and distributions at the time they enter
the Targeted Dividend program. Nevertheless, investors should review the
prospectus of the targeted Morgan Stanley Dean Witter Fund before entering
the program.
Direct Investments through Transfer Agent. As discussed in the Prospectus,
a shareholder may make additional investments in Fund shares at any time
through the Shareholder Investment Account by sending a check in any amount,
not less than $100, payable to Morgan Stanley Dean Witter Limited Term
Municipal Trust, directly to the Fund's Transfer Agent. The investment
proceeds will be applied to the purchase of shares of the Fund at the net
asset value per share next computed after receipt of the check or purchase
payment by the Transfer Agent. The shares so purchased will be credited to
the investor's account.
Tax-Sheltered Retirement Plans. Retirement plans are available for use by
corporations, the self-employed, Individual Retirement Accounts and Custodial
Accounts under Section 403(b)(7) of the Internal Revenue Code. Adoption of
such plans should be on advice of legal counsel or tax adviser.
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For further information regarding plan administration, custodial fees and
other details, investors should contact their Morgan Stanley Dean Witter
Financial Advisor or other Selected Broker-Dealer representative or the
Transfer Agent.
Exchange Privilege. As discussed in the Prospectus under the caption
"Exchange Privilege," an Exchange Privilege exists whereby investors who have
purchased shares of any of the Morgan Stanley Dean Witter Funds that are
multiple class funds ("Morgan Stanley Dean Witter Multi-Class Funds"), shares
of Morgan Stanley Dean Witter Multi-State Municipal Series Trust and Morgan
Stanley Dean Witter Hawaii Municipal Trust, which are Morgan Stanley Dean
Witter Funds sold with a front-end sales charge ("FSC Funds"), and shares of
Morgan Stanley Dean Witter Global Short-Term Income Fund Inc. ("Global
Short-Term"), which is a Morgan Stanley Dean Witter Fund offered with a
contingent deferred sales charge ("CDSC"), will be permitted, after the
shares of the fund acquired by purchase (not by exchange or dividend
reinvestment) have been held for thirty days, to redeem all or part of their
shares in that fund, have the proceeds invested in shares of the Fund, Morgan
Stanley Dean Witter Intermediate Term U.S. Treasury Trust, Morgan Stanley
Dean Witter Short-Term U.S. Treasury Trust and Morgan Stanley Dean Witter
Short-Term Bond Fund, and in shares of five money market funds: Morgan
Stanley Dean Witter Liquid Asset Fund Inc., Morgan Stanley Dean Witter
Tax-Free Daily Income Trust, Morgan Stanley Dean Witter California Tax-Free
Daily Income Trust, Morgan Stanley Dean Witter New York Municipal Money
Market Trust, or Morgan Stanley Dean Witter U.S. Government Money Market
Trust (these nine funds, including the Fund, are hereinafter collectively
referred to as "Exchange Funds"). There is no waiting period for exchanges of
shares acquired by exchange or dividend reinvestment. Shares of the Exchange
Funds received in an exchange for shares of a Morgan Stanley Dean Witter
Multi-Class Fund may be redeemed and exchanged only for shares of the
corresponding Class of a Morgan Stanley Dean Witter Multi-Class Fund or for
shares of one of the other Exchange Funds, provided that shares of the
Exchange Funds received in an exchange for Class A shares of a Morgan Stanley
Dean Witter Multi-Class Fund may also be redeemed and exchanged for shares of a
FSC Fund, and shares of the Exchange Funds received in an exchange for Class B
shares of a Morgan Stanley Dean Witter Multi-Class Fund may also be redeemed
and exchanged for shares of a Global Short-Term. In addition, shares of the
Exchange Funds received in an exchange for shares of a FSC Fund may be
redeemed and exchanged for Class A shares of a Morgan Stanley Dean Witter
Multi-Class Fund or for shares of one of the other Exchange Funds, and shares
of the Exchange Funds received in an exchange for shares of a Global
Short-Term may be redeemed and exchanged for Class B shares of a Morgan
Stanley Dean Witter Multi-Class Fund or for shares of one of the other
Exchange Funds. Ultimately, any applicable CDSC will have to be paid upon
redemption of shares originally purchased from Global Short-Term or a Class
of a Morgan Stanley Dean Witter Multi-Class Fund that imposes a CDSC. An
exchange will be treated for federal income tax purposes the same as a
repurchase or redemption of shares, on which the shareholder may realize a
capital gain or loss.
Any new account established through the Exchange Privilege will have the
same registration and cash dividend or dividend reinvestment plan as the
present account, unless the Transfer Agent receives written notification to
the contrary. For telephone exchanges, the exact registration of the existing
account and the account number must be provided.
Any shares held in certificate form cannot be exchanged but must be
forwarded to the Transfer Agent and deposited into the shareholder's account
before being eligible for exchange. (Certificates mailed in for deposit
should not be endorsed.)
When shares of a Morgan Stanley Dean Witter Multi-Class Fund or Global
Short-Term are exchanged for shares of any Exchange Fund, the exchange is
executed at no charge to the shareholder, without the imposition of the CDSC
at the time of the exchange. During the period of time the shareholder
remains in the Exchange Fund (calculated from the last day of the month in
which the Exchange Fund shares were acquired), the holding period or "year
since purchase payment made" is frozen. When shares are redeemed out of the
Exchange Fund, they will be subject to a CDSC which would be based upon the
period of time the shareholder held shares in a Morgan Stanley Dean Witter
Multi-Class Fund or in Global Short-Term. However, in the case of shares
exchanged into the Exchange Fund on or after April 23, 1990, upon redemption
of shares which results in a CDSC being imposed, a credit (not to
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exceed the amount of the CDSC) will be given in an amount equal to the
Exchange Fund 12b-1 distribution fees, if any, incurred on or after that date
which are attributable to those shares. Shareholders acquiring shares of an
Exchange Fund pursuant to this exchange privilege may exchange those shares
back into a Morgan Stanley Dean Witter Multi-Class Fund or Global Short-Term
from the Exchange Fund, with no CDSC being imposed on such exchange. The
holding period previously frozen when shares were first exchanged for shares
of the Exchange Fund resumes on the last day of the month in which shares of
a Morgan Stanley Dean Witter Multi-Class Fund or of Global Short-Term are
reacquired. Thus, a CDSC is imposed only upon an ultimate redemption, based
upon the time (calculated as described above) the shareholder was invested in
a Morgan Stanley Dean Witter Multi-Class Fund or in Global Short-Term. In the
case of exchanges of Class A shares of a Morgan Stanley Dean Witter
Multi-Class Fund which are subject to a CDSC, the holding period also
includes the time (calculated as described above) the shareholder was
invested in a FSC Fund.
When shares initially purchased in a Morgan Stanley Dean Witter
Multi-Class Fund or in Global Short-Term are exchanged for shares of a Morgan
Stanley Dean Witter Multi-Class Fund, shares of Global Short-Term, shares of
a FSC Fund, or shares of an Exchange Fund, the date of purchase of the shares
of the fund exchanged into, for purposes of the CDSC upon redemption, will be
the last day of the month in which the shares being exchanged were originally
purchased. In allocating the purchase payments between funds for purposes of
the CDSC, the amount which represents the current net asset value of shares
at the time of the exchange which were (i) purchased more than one, three or
six years (depending on the CDSC schedule applicable to the shares) prior to
the exchange, (ii) originally acquired through reinvestment of dividends or
distributions and (iii) acquired in exchange for shares of FSC Funds, or for
shares of other Morgan Stanley Dean Witter Funds for which shares of FSC
Funds have been exchanged (all such shares called "Free Shares"), will be
exchanged first. After an exchange, all dividends earned on shares in the
Exchange Fund will be considered Free Shares. If the exchanged amount exceeds
the value of such Free Shares, an exchange is made, on a block-by-block
basis, of non-Free Shares held for the longest period of time (except that if
shares held for identical periods of time but subject to different CDSC
schedules are held in the same Exchange Privilege account, the shares of that
block that are subject to a lower CDSC rate will be exchanged prior to the
shares of that block that are subject to a higher CDSC rate). Shares equal to
any appreciation in the value of non-Free Shares exchanged will be treated as
Free Shares, and the amount of the purchase payments for the non-Free Shares
of the fund exchanged into will be equal to the lesser of (a) the purchase
payments for, or (b) the current net asset value of, the exchanged non-Free
Shares. If an exchange between funds would result in exchange of only part of
a particular block of non-Free Shares, then shares equal to any appreciation
in the value of the block (up to the amount of the exchange) will be treated
as Free Shares and exchanged first, and the purchase payment for that block
will be allocated on a pro rata basis between the non-Free Shares of that
block to be retained and the non-Free Shares to be exchanged. The prorated
amount of such purchase payment attributable to the retained non-Free Shares
will remain as the purchase payment for such shares, and the amount of
purchase payment for the exchanged non-Free Shares will be equal to the
lesser of (a) the prorated amount of the purchase payment for, or (b) the
current net asset value of, those exchanged non-Free Shares. Based upon the
procedures described in the Morgan Stanley Dean Witter Multi-Class Fund
Prospectus under the caption "Purchase of Fund Shares" and in the Global
Short-Term Prospectus under the caption "Contingent Deferred Sales Charge,"
any applicable CDSC will be imposed upon the ultimate redemption of shares of
any fund, regardless of the number of exchanges since those shares were
originally purchased.
With respect to the redemption or repurchase of shares of the Fund, the
application of proceeds to the purchase of new shares in the Fund or any
other of the funds and the general administration of the Exchange Privilege,
the Transfer Agent acts as agent for the Distributor and for the
shareholder's selected broker-dealer, if any, in the performance of such
functions. With respect to exchanges, redemptions or repurchases, the
Transfer Agent shall be liable for its own negligence and not for the default
or negligence of its correspondents or for losses in transit. The Fund shall
not be liable for any default or negligence of the Transfer Agent, the
Distributor or any selected broker-dealer.
The Distributor and any selected broker-dealer have authorized and
appointed the Transfer Agent to act as their agent in connection with the
application of proceeds of any redemption of Fund shares to
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the purchase of the shares of any other fund and the general administration
of the Exchange Privilege. No commission or discounts will be paid to the
Distributor or any selected broker-dealer for any transactions pursuant to
this Exchange Privilege.
Shares of the Fund acquired pursuant to the Exchange Privilege will be
held by the Fund's Transfer Agent in an Exchange Privilege account distinct
from any account of the same shareholder who may have acquired shares of the
Fund directly. A shareholder of the Fund will not be permitted to make
additional investments in such Exchange Privilege account, except through the
exchange of additional shares of the fund in which the shareholder had
initially invested, and the proceeds of any shares redeemed from such
Exchange Privilege account may not thereafter be placed back into that
Exchange Privilege account, except by utilizing the Reinstatement Privilege
(see "Redemptions and Repurchases--Reinstatement Privilege"). If such a
shareholder desires to make any additional investments in the Fund, a
separate account will be maintained for receipt of such investments. The Fund
will have additional costs for account maintenance if a shareholder has more
than one account with the Fund.
Exchanges are subject to the minimum investment requirement and any other
conditions imposed by each fund. (The minimum initial investment for the
Exchange Privilege account of each Class is $10,000 for the Fund (although
the Fund, in its discretion, may accept initial investments of as low as
$5,000) and $5,000 for Morgan Stanley Dean Witter Liquid Asset Fund Inc.,
Morgan Stanley Dean Witter Tax-Free Daily Income Trust, Morgan Stanley Dean
Witter California Tax-Free Daily Income Trust, and Morgan Stanley Dean Witter
New York Municipal Money Market Trust, although those funds may, at their
discretion, accept initial investments of as low as $1,000. The minimum
initial investment for the Exchange Privilege account of each Class is $5,000
for Morgan Stanley Dean Witter Special Value Fund. The minimum initial
investment for the Exchange Privilege account of each Class of all other
Morgan Stanley Dean Witter Funds for which the Exchange Privilege is
available is $1,000.) Upon exchange into an Exchange Fund, the shares of that
fund will be held in a special Exchange Privilege account separately from
accounts of those shareholders who have acquired their shares directly from
that fund. As a result, certain services normally available to shareholders
of the Fund or of money market funds, including the check writing feature,
will not be available for funds held in that account.
The Fund and each of the other Morgan Stanley Dean Witter Funds may limit
the number of times this Exchange Privilege may be exercised by any investor
within a specified period of time. Also, the Exchange Privilege may be
terminated or revised at any time by any of the Morgan Stanley Dean Witter
Funds, upon such notice as may be required by applicable regulatory agencies
(presently sixty days' prior written notice for termination or material
revision), provided that six months' prior written notice of termination will
be given to the shareholders who hold shares of Exchange Funds pursuant to
this Exchange Privilege, and provided further that the Exchange Privilege may
be terminated or materially revised at times (a) when the New York Stock
Exchange is closed for other than customary weekends and holidays, (b) when
trading on that Exchange is restricted, (c) when an emergency exists as a
result of which disposal by the Fund of securities owned by it is not
reasonably practicable or it is not reasonably practicable for the Fund
fairly to determine the value of its net assets, (d) during any other period
when the Securities and Exchange Commission by order so permits (provided
that applicable rules and regulations of the Securities and Exchange
Commission shall govern as to whether the conditions prescribed in (b) or (c)
exist), or (e), if the Fund would be unable to invest amounts effectively in
accordance with its investment objective(s), policies and restrictions.
For further information regarding the Exchange Privilege, shareholders
should contact their Morgan Stanley Dean Witter Financial Advisor or other
Selected Broker-Dealer representative or the Transfer Agent.
REDEMPTIONS AND REPURCHASES
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Payment for Shares Redeemed or Repurchased. As discussed in the
Prospectus, payment for shares presented for repurchase or redemption will be
made by check within seven days after receipt by the Transfer Agent of the
certificate and/or written request in good order. The term "good order" means
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that the share certificate, if any, and request for redemption, are properly
signed, accompanied by any documentation required by the Transfer Agent, and
bear signature guarantees when required by the Fund or the Transfer Agent.
Such payment may be postponed or the right of redemption suspended at times
(a) when the New York Stock Exchange is closed for other than customary
weekends and holidays, (b) when trading on that Exchange is restricted, (c)
when an emergency exists as a result of which disposal by the Fund of
securities owned by it is not reasonably practicable or it is not reasonably
practicable for the Fund fairly to determine the value of its net assets, or
(d) during any other period when the Securities and Exchange Commission by
order so permits; provided that applicable rules and regulations of the
Securities and Exchange Commission shall govern as to whether the conditions
prescribed in (b) or (c) exist. If the shares to be redeemed have recently
been purchased by check (including a certified check or bank cashier's
check), payment of the redemption proceeds may be delayed for the minimum
time needed to verify that the check used for investment has been honored
(not more than fifteen days from the time of receipt of the check by the
Transfer Agent). It has been and remains the Fund's policy and practice that,
if checks for redemption proceeds remain uncashed, no interest will accrue on
amounts represented by such uncashed checks. Shareholders maintaining margin
accounts with DWR or another Selected Broker-Dealer are referred to their
Morgan Stanley Dean Witter Financial Advisor or other Selected Broker-Dealer
representative regarding restrictions on redemption of shares of the Fund
pledged in the margin account.
Involuntary Redemption. As described in the Prospectus, due to the
relatively high cost of handling small investments, the Fund reserves the
right to redeem, at net asset value, the shares of any shareholder whose
shares have a value of less than $100, or such lesser amount as may be fixed
by the Board of Trustees. However, before the Fund redeems such shares and
sends the proceeds to the shareholder, it will notify the shareholder that
the value of the shares is less than $100 and allow him or her 60 days to
make an additional investment in an amount which will increase the value of
his or her account to $100 or more before the redemption is processed.
Reinstatement Privilege. As discussed in the Prospectus, a shareholder who
has had his or her shares redeemed or repurchased and has not previously
exercised this reinstatement privilege may within 30 days after the date of
redemption or repurchase reinstate any portion of all of the proceeds of such
redemption or repurchase in shares of a Morgan Stanley Dean Witter Fund at
the net asset value next determined after a reinstatement request, together
with such proceeds, is received by the Transfer Agent.
Exercise of the reinstatement privilege will not affect the federal income
tax treatment of any gain or loss realized upon the redemption or repurchase,
except that if the redemption or repurchase resulted in a loss and
reinstatement is made in shares of a Morgan Stanley Dean Witter Fund, some or
all of the loss, depending on the amount reinstated, will not be allowed as a
deduction for federal income tax purposes, but will be applied to adjust the
cost basis of the shares acquired upon reinstatement.
DIVIDENDS, DISTRIBUTIONS AND TAXES
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The Fund intends to distribute substantially all of its net investment
income and all of its net short-term capital gains, if any, and will
determine whether to retain all or part of any net long-term capital gains
for reinvestment. If any such gains are retained, the Fund will pay federal
income tax thereon, and will notify shareholders that following such election
the shareholders will be required to include such undistributed gains in
determining their taxable income and may claim their share of the tax paid as
a credit against their individual federal income tax (but not the personal
income tax of a particular state).
As discussed in the Prospectus, the Fund may invest a portion of its
assets in certain "private activity bonds" issued after August 7, 1986. As a
result, a portion of the exempt-interest dividends paid by the Fund may be an
item of tax preference to shareholders subject to the federal alternative
minimum tax. Certain corporations which are subject to the alternative
minimum tax may also have to include exempt-interest dividends in calculating
their alternative minimum taxable income in situations where the "adjusted
current earnings" of the corporation exceeds its alternative minimum taxable
income.
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Each shareholder will be sent a summary of his or her account, at least
quarterly, including information as to reinvested dividends and capital gains
distributions. Share certificates for dividends or distributions will not be
issued unless a shareholder requests in writing that a certificate be issued
for a specific number of shares.
In computing interest income, the Fund will amortize any premiums and
original issue discounts on securities owned. Additionally, with respect to
market discount on bonds purchased after April 30, 1993, a portion of any
capital gain realized upon disposition is recharacterized as investment
income. Capital gains or losses realized upon sale or maturity of such
securities will be based on their amortized cost.
Gains or losses on the sales of securities by the Fund will be long-term
capital gains or losses if the securities have been held by the Fund for more
than twelve months. Gains or losses on the sale of securities held for twelve
months or less will be short-term capital gains or losses. Gains and losses
on the sale, expiration or other termination of options on securities will
generally be treated as gains and losses from the sale of securities.
Pursuant to present federal income tax laws, futures contracts held by the
Fund at the end of each fiscal year will be required to be
"marked-to-market," that is, treated as having been sold at their fair market
value at such date. Sixty percent of any gain or loss recognized on these
deemed sales will be treated as long-term capital gain or loss, and the
remainder will be treated as short-term capital gain or loss. Gains or losses
from options on futures and options on debt instruments will also generally
be treated as part short-term and part long-term capital gains or losses,
unless such gains or losses were incurred as part of a securities "straddle,"
in which case the appropriate straddle rules of the Internal Revenue Code
(the "Code") would apply.
Because the Fund intends to distribute all of its net investment income
and capital gains to shareholders and otherwise continue to qualify as a
regulated investment company under Subchapter M of the Internal Revenue Code,
it is not expected that the Fund will be required to pay any federal income
tax. Shareholders will normally have to pay federal income taxes, and any
applicable state and/or local income taxes, on the dividends and
distributions they receive from the Fund. Such dividends and distributions,
to the extent that they are derived from net investment income or short-term
capital gains, are taxable to the shareholder as ordinary income regardless
of whether the shareholder receives such payments in additional shares or in
cash. Any dividends declared in the last quarter of any calendar year which
are paid in the following calendar year prior to February 1 will be deemed
received by the shareholder in the prior calendar year.
One of the requirements for regulated investment company status is that at
least 90% of a fund's gross income be derived from dividends, interest, gains
from the sale or other disposition of securities and certain other related
income. Accordingly, the Fund may be restricted in the writing of options on
securities held for less than three months, in the writing of options which
expire in less than three months, and in effecting closing transactions with
respect to call or put options which have been written or purchased less than
three months prior to such transactions. The Fund may also be restricted in
its ability to engage in transactions involving futures contracts.
As discussed in the Prospectus, the Fund intends to qualify to pay
"exempt-interest dividends" to its shareholders by maintaining, as of the
close of each quarter of its taxable year, at least 50% of the value of its
total assets in tax-exempt securities. An exempt-interest dividend is that
part of dividend distributions made by the Fund which consists of interest
received by the Fund on tax-exempt securities upon which the shareholder
incurs no federal income taxes (apart from any possible application of the
alternative minimum tax).
Under the Revenue Reconciliation Act of 1993, all or a portion of the
Fund's gain from the sale or redemption of tax-exempt obligations purchased
at a market discount after April 30, 1993 will be treated as ordinary income
rather than capital gain. This rule may increase the amount of ordinary
income dividends received by shareholders.
The Fund will mail to shareholders a statement indicating the percentage
of the dividend distributions for each fiscal year which constitutes
exempt-interest dividends and the percentage, if any, that is taxable, and
the percentage, if any, of the exempt-interest dividends which constitutes an
item of
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tax preference, and to what extent the taxable portion is long-term capital
gain or ordinary income. These percentages should be applied uniformly to all
monthly distributions made during the fiscal year to determine the proportion
of dividends that is tax-exempt. The percentages may differ from the
percentage of tax-exempt dividend distributions for any particular month.
Shareholders will be subject to federal income tax on dividends paid from
interest income derived from taxable securities and on distributions of net
short-term capital gains. Such dividends and distributions are taxable to the
shareholder as ordinary dividend income regardless of whether the shareholder
receives such distributions in additional shares or in cash. Distributions of
long-term capital gains, if any, are taxable as long-term gains, regardless
of how long the shareholder has held Fund shares and whether the distribution
is received in additional shares or in cash. Since the Fund's income is
expected to be derived entirely from interest rather than dividends, none of
such dividend distributions will be eligible for the 70% dividends received
deduction generally available to corporations. Net long-term capital gains
distributions are not eligible for the dividends received deduction.
Any loss on the sale or exchange of shares of the Fund which are held for
six months or less is disallowed to the extent of the amount of any
exempt-interest dividends paid with respect to such shares. Treasury
Regulations may provide for a reduction in such required holding period. If a
shareholder receives a distribution that is taxed as long-term capital gain
on shares held for six months or less and then sells those shares at a loss,
the loss will be treated as a long-term capital loss to the extent of the
capital gains distribution.
Interest on indebtedness incurred or continued by a shareholder to
purchase or carry shares of the Fund is not deductible to the extent
allocable to exempt-interest dividends of the Fund (which allocation does not
take into account capital gain distributions from the Fund). Furthermore,
entities or persons who are "substantial users" (or related persons) of
facilities financed by industrial development bonds should consult their tax
advisers before purchasing shares of the Fund. "Substantial user" is defined
generally by Income Tax Regulation 1.103-11 (b) as including a "non-exempt
person" who regularly uses in a trade or business a part of a facility
financed from the proceeds of industrial development bonds.
Federal Income Tax Status. From time to time, proposals have been
introduced before Congress for the purpose of restricting or eliminating the
federal income tax exemption for interest on municipal securities. It can be
expected that similar proposals may be introduced in the future. If such a
proposal were enacted, the availability of municipal securities for
investment by the Fund could be affected. In such event, the Fund would
re-evaluate its investment objective and policies.
At March 31, 1998, the Fund had an approximate net capital loss carryover
of $8,789,000 of which $4,621,000 will be available through March 31, 2003,
$3,941,000 will be available through March 31, 2004 and $227,000 will be
available through March 31, 2005. To the extent that these net capital loss
carryovers are used to offset future capital gains, it is probable that the
gains so offset will not be distributed to shareholders.
Any dividends or distributions received by a shareholder from any
investment company will have the effect of reducing the net asset value of
the shareholder's stock in that fund by the exact amount of the dividend or
distribution. Furthermore, capital gains distributions are, and some portion
of the dividends may be, subject to income tax. If the net asset value of the
shares should be reduced below a shareholder's cost as a result of the
payment of taxable dividends or the distribution of realized long-term
capital gains, such payment or distribution would be in part a return of
capital but nonetheless taxable to the shareholder. Therefore, an investor
should consider the tax implications of purchasing Fund shares immediately
prior to a distribution record date.
The foregoing relates to federal income taxation in effect as of the date
of the Prospectus.
The Fund is organized as a Massachusetts business trust. Under current
law, so long as it qualifies as a "regulated investment company" under the
Code, the Fund itself is not liable for any income or franchise tax in The
Commonwealth of Massachusetts.
33
<PAGE>
PERFORMANCE INFORMATION
- -----------------------------------------------------------------------------
As discussed in the Prospectus, from time to time the Fund may quote its
"yield" and/or its "total return" in advertisements and sales literature. The
yield is calculated for any 30-day period as follows: the amount of interest
income for each security in the Fund's portfolio is determined in accordance
with regulatory requirements; the total for the entire portfolio constitutes
the Fund's gross income for the period. Expenses accrued during the period
are subtracted to arrive at "net investment income". The resulting amount is
divided by the product of the net asset value per share of the Fund on the
last day of the period multiplied by the average number of shares outstanding
during the period that were entitled to dividends. This amount is added to 1
and raised to the sixth power. 1 is then subtracted from the result and the
difference is multiplied by 2 to arrive at the annualized yield. Based on the
foregoing calculation, the Fund's annualized yield for the thirty (30) day
period ending March 31, 1998 was 3.40%.
To determine interest income from debt obligations, a yield-to-maturity,
expressed as a percentage, is determined for obligations held at the
beginning of the period, based on the current market value of the security
plus accrued interest, generally as of the end of the month preceding the
30-day period, or, for obligations purchased during the period, based on the
cost of the security (including accrued interest). The yield-to-maturity is
multiplied by the market value (plus accrued interest) for each security and
the result is divided by 360 and multiplied by 30 days or the number of days
the security was held during the period, if less. Modifications are made for
determining yield-to-maturity on certain tax-exempt securities.
The Fund may also quote a "tax-equivalent yield" determined by dividing
the tax-exempt portion of the quoted yield by 1 minus the stated income tax
rate and adding the result to the portion of the yield that is not
tax-exempt. Based on the foregoing calculation and a Federal personal income
tax bracket of 39.6%, the Fund's annualized tax-equivalent yield for the
thirty (30) day period ending March 31, 1998 was 5.63%.
The Fund's "average annual total return" represents an annualization of
the Fund's total return over a particular period and is computed by finding
the annual percentage rate which will result in the ending redeemable value
of a hypothetical $1,000 investment made at the beginning of a one, five or
ten year period, or for the period from the date of commencement of the
Fund's operations, if shorter than any of the foregoing. For the purpose of
this calculation, it is assumed that all dividends and distributions are
reinvested. The formula for computing the average annual total return
involves a percentage obtained by dividing the ending redeemable value by the
amount of the initial investment, taking a root of the quotient (where the
root is equivalent to the number of years in the period) and subtracting 1
from the result. Based on the foregoing calculation, the Fund's average
annual total return for the fiscal year ended March 31, 1998 and for the
period July 12, 1993 (commencement of operations) through March 31, 1998 was
7.70% and 4.76%, respectively.
In addition to the foregoing, the Fund may advertise its total return over
different periods of time by means of aggregate, average, year-by-year or
other types of total return figures. In addition, the Fund may also compute
its aggregate total return for specified periods by determining the aggregate
percentage rate which will result in the ending value of a hypothetical
$1,000 investment made at the beginning of the period. For the purpose of
this calculation, it is assumed that all dividends and distributions are
reinvested. The formula for computing aggregate total return involves a
percentage obtained by dividing the ending value by the initial $1,000
investment and subtracting 1 from the result. Based on the foregoing
calculation, the Fund's aggregate total return for the fiscal year ended
March 31, 1998 and for the period July 12, 1993 (commencement of operations)
through March 31, 1998 was 7.70% and 24.50%, respectively. The Fund may also
advertise the growth of hypothetical investments of $10,000, $50,000 and
$100,000 in shares of the Fund by adding 1 to the Fund's aggregate total
return (expressed as a decimal) and multiplying by $10,000, $50,000 or
$100,000 as the case may be. Investments of $10,000, $50,000 and $100,000 in
the Fund at inception would have grown to $12,450, $62,250 and $124,500,
respectively at March 31, 1998.
The Fund from time to time may also advertise its performance relative to
certain performance rankings and indices compiled by independent
organizations.
34
<PAGE>
SHARES OF THE FUND
- -----------------------------------------------------------------------------
As discussed in the Prospectus, the shareholders of the Fund are entitled
to a full vote for each full share held. All of the Trustees have been
elected by the shareholders of the Fund, most recently at a Special Meeting
of Shareholders held on May 21, 1997. The Trustees themselves have the power
to alter the number and the terms of office of the Trustees (as provided for
in the Declaration of Trust), and they may at any time lengthen or shorten
their own terms or make their terms of unlimited duration and appoint their
own successors, provided that always at least a majority of the Trustees has
been elected by the shareholders of the Fund. Under certain circumstances the
Trustees may be removed by action of the Trustees. The shareholders also have
the right under certain circumstances to remove the Trustees following a
meeting called for the purpose, requested in writing by recordholders of not
less than 10% of the Fund's outstanding shares. The voting rights of
shareholders are not cumulative, so that holders of more than 50 percent of
the shares voting can, if they choose, elect all Trustees being elected,
while the holders of the remaining shares would be unable to elect any
Trustees.
The Declaration of Trust permits the Trustees to authorize the creation of
additional series of shares (the proceeds of which would be invested in
separate, independently managed portfolios) and additional classes of shares
within any series (which would be used to distinguish among the rights of
different categories of shareholders.) The Trustees have not presently
authorized any such additional series or classes of shares.
The Fund is not required to hold Annual Meetings of Shareholders and in
ordinary circumstances the Fund does not intend to hold such meetings. The
Trustees may call Special Meetings of Shareholders for action by shareholder
vote as may be required by the Act or the Declaration of Trust.
The Declaration of Trust further provides that no Trustee, officer,
employee or agent of the Fund is liable to the Fund or to a shareholder, nor
is any Trustee, officer, employee or agent liable to any third persons in
connection with the affairs of the Fund, except as such liability may arise
from his/her or its own bad faith, willful misfeasance, gross negligence, or
reckless disregard of his/her or its duties. It also provides that all third
persons shall look solely to the Fund's property for satisfaction of claims
arising in connection with the affairs of the Fund. With the exceptions
stated, the Declaration of Trust provides that a Trustee, officer, employee
or agent is entitled to be indemnified against all liability in connection
with the affairs of the Fund.
The Fund shall be of unlimited duration subject to the provisions in the
Declaration of Trust concerning termination by action of the shareholders.
CUSTODIAN AND TRANSFER AGENT
- -----------------------------------------------------------------------------
The Bank of New York, 90 Washington Street, New York, New York 10286 is
the Custodian of the Fund's assets. Any Fund cash balances with the Custodian
in excess of $100,000 are unprotected by federal deposit insurance. Such
balances may at times be substantial.
Morgan Stanley Dean Witter Trust FSB ("MSDW Trust"), Harborside Financial
Center, Plaza Two, Jersey City, New Jersey 07311 is the Transfer Agent of the
Fund's shares and Dividend Disbursing Agent for payment of dividends and
distributions of Fund shares and Agent for shareholders under various
investment plans described herein. MSDW Trust is an affiliate of Morgan
Stanley Dean Witter Advisors Inc., the Fund's Investment Manager and of
Morgan Stanley Dean Witter Distributors Inc., the Fund's Distributor. As
Transfer Agent and Dividend Disbursing Agent, MSDW Trust's responsibilities
include maintaining shareholder accounts, including providing sub-account and
recordkeeping services for certain retirement accounts, disbursing cash
dividends and distributions and reinvesting dividends and distributions,
processing account registration changes, handling purchase and redemption
transactions, mailing prospectuses and reports, mailing and tabulating
proxies, processing share certificate transactions, and maintaining
shareholder records and lists. For these services, MDSW Trust receives a per
shareholder account fee from the Fund.
35
<PAGE>
INDEPENDENT ACCOUNTANTS
- -----------------------------------------------------------------------------
Price Waterhouse LLP serves as the independent accountants of the Fund.
The independent accountants are responsible for auditing the annual financial
statements of the Fund.
REPORTS TO SHAREHOLDERS
- -----------------------------------------------------------------------------
The Fund will send to shareholders, at least semi-annually, reports
showing the Fund's portfolio and other information. An annual report,
containing financial statements audited by independent accountants together
with their report thereon, will be sent to shareholders each year.
The Fund's fiscal year ends on March 31. The financial statements of the
Fund must be audited at least once a year by independent accountants whose
selection is made annually by the Fund's Trustees.
LEGAL COUNSEL
- -----------------------------------------------------------------------------
Barry Fink, Esq., who is an officer and the General Counsel of the
Investment Manager, is an officer and the General Counsel of the Fund.
EXPERTS
- -----------------------------------------------------------------------------
The financial statements of the Fund included in this Statement of
Additional Information and incorporated by reference in the Prospectus have
been so included and incorporated in reliance on the report of Price
Waterhouse LLP, independent accountants, given on the authority of said firm
as experts in auditing and accounting.
REGISTRATION STATEMENT
- -----------------------------------------------------------------------------
This Statement of Additional Information and the Prospectus do not contain
all of the information set forth in the Registration Statement the Fund has
filed with the Securities and Exchange Commission. The complete Registration
Statement may be obtained from the Securities and Exchange Commission upon
payment of the fee prescribed by the rules and regulations of the Commission.
36
<PAGE>
DEAN WITTER LIMITED TERM MUNICIPAL TRUST
PORTFOLIO OF INVESTMENTS March 31, 1998
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
TAX-EXEMPT MUNICIPAL BONDS (88.3%)
General Obligation (8.9%)
$1,000 Wilmington, Delaware, Refg Ser 1993 B (FGIC) .................... 4.60 % 07/01/04 $1,018,970
1,000 Honolulu, Hawaii, Refg Ser 1993 B ............................... 5.00 10/01/03 1,034,950
1,000 Rosemont, Illinois, Ser 1993 B .................................. 5.30 12/01/04 1,052,040
1,000 Massachusetts, Refg Ser 1993 C .................................. 4.80 08/01/03 1,025,470
1,000 Massillon City School District, Ohio, Refg Ser 1994 (AMBAC) ..... 4.70 12/01/05 1,021,900
- ----------- -------------
5,000 5,153,330
- ----------- -------------
Educational Facilities Revenue (10.8%)
1,000 University of Delaware, Ser 1993 ................................ 4.90 11/01/02 1,030,980
1,000 Massachusetts Health & Educational Facilities Authority, Boston
College Ser K .................................................. 4.80 06/01/04 1,027,870
2,000 University of Minnesota, Ser 1993 A ............................. 4.80 08/15/03 2,051,220
2,000 New York State Dormitory Authority, State University Ser 1993 B . 5.25 05/15/05 2,089,200
- ----------- -------------
6,000 6,199,270
- ----------- -------------
Electric Revenue (5.3%)
1,000 Salt River Project Agricultural Improvement & Power District,
Arizona, Refg Ser 1993 B ....................................... 4.75 01/01/03 1,025,570
2,000 San Antonio, Texas, Electric & Gas Refg Ser 1994 ................ 4.70 02/01/05 2,033,780
- ----------- -------------
3,000 3,059,350
- ----------- -------------
Hospital Revenue (8.9%)
1,000 California Statewide Communities Development Authority,
Cedars-Sinai Medical Center Ser 1993 ........................... 4.70 11/01/03 1,019,630
1,000 Michigan Hospital Finance Authority, McLaren Obligated Group Ser
1993 A ......................................................... 5.00 10/15/04 1,027,460
1,000 Murray, Utah, IHC Hospitals Inc Refg Ser 1993 (AMBAC) ........... 5.00 05/15/04 1,038,370
1,000 Fairfax County Industrial Development Authority, Virginia, Inova
Health System Foundation Refg Ser 1993 A ....................... 4.70 08/15/04 1,021,480
1,000 Wisconsin Health & Educational Facilities Authority, Hospital
Sisters Services Ser 1993 (MBIA) ............................... 5.00 06/01/03 1,030,200
- ----------- -------------
5,000 5,137,140
- ----------- -------------
Industrial Development/Pollution Control Revenue (5.4%)
1,000 Massachusetts Industrial Finance Agency, Eastern Edison Co Refg
Ser 1993 ....................................................... 5.875 08/01/08 1,036,020
2,000 Greenwood, Wisconsin, Land O'Lakes Inc (AMT) .................... 5.50 09/01/03 2,046,800
- ----------- -------------
3,000 3,082,820
- ----------- -------------
Mortgage Revenue-Multi-Family (3.8%)
2,130 Wisconsin Housing & Economic Development Authority, Ser 1993 B
(AMT) .......................................................... 5.10 11/01/03 2,171,109
- ----------- -------------
Mortgage Revenue-Single Family (3.6%)
2,000 Connecticut Housing Finance Authority, 1993 Subser F-1 .......... 4.90 05/15/04 2,042,940
- ----------- -------------
SEE NOTES TO FINANCIAL STATEMENTS
37
<PAGE>
DEAN WITTER LIMITED TERM MUNICIPAL TRUST
PORTFOLIO OF INVESTMENTS March 31, 1998, continued
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- --------------------------------------------------------------------------------------------------------------
Public Facilities Revenue (4.4%)
$1,000 Regional Convention & Sports Complex Authority, Missouri, Refg
Ser A 1993 ..................................................... 4.75 % 08/15/04 $1,016,440
1,500 Ohio Building Authority, Correctional Refg 1994 Ser A ........... 4.65 10/01/04 1,530,345
- ----------- -------------
2,500 2,546,785
- ----------- -------------
Resource Recovery Revenue (3.6%)
2,000 Northeast Maryland Waste Disposal Authority, Montgomery County
Ser 1993 A (AMT) ............................................... 5.50 07/01/01 2,071,920
- ----------- -------------
Student Loan Revenue (7.1%)
2,000 Montana Higher Education Student Assistance Corporation, Senior
Ser 1993 B (AMT) ............................................... 5.10 12/01/01 2,042,740
2,000 South Carolina Education Assistance Authority, Ser 1993 A-1
(AMT) .......................................................... 5.00 09/01/03 2,033,100
- ----------- -------------
4,000 4,075,840
- ----------- -------------
Tax Allocation (3.3%)
1,835 Pleasanton Joint Powers Financing Authority, California,
Reassessment Ser 1993 A ........................................ 5.60 09/02/00 1,891,738
- ----------- -------------
Transportation Facilities Revenue (10.7%)
1,000 Delaware River & Bay Authority, Delaware & New Jersey, Ser
1993+ .......................................................... 4.50 01/01/04 1,011,050
2,000 Washington Metropolitan Area Transit Authority, District of
Columbia, Maryland and Virginia, Refg Ser 1993 (FGIC)++ ........ 4.90 01/01/05 2,060,080
1,000 Chicago, Illinois, Chicago-O'Hare Int'l Airport Refg Ser 1993 A . 4.80 01/01/05 1,014,900
2,000 Harris County, Texas, Toll Road Refg Ser 1994 (AMBAC) ........... 4.85 08/15/05 2,059,860
- ----------- -------------
6,000 6,145,890
- ----------- -------------
Water & Sewer Revenue (8.9%)
1,000 Atlanta, Georgia, Water & Sewer Ser 1993 ........................ 4.50 01/01/04 1,011,050
1,000 Massachusetts Water Resources Authority, Ser 1993 C ............. 5.25 12/01/06 1,052,540
1,000 New York City Municipal Water Finance Authority, New York, Ser
1994 B ......................................................... 5.125 06/15/04 1,040,030
1,000 Pittsburgh Water & Sewer Authority, Pennsylvania, Refg Ser 1993
A (FGIC) ....................................................... 4.60 09/01/03 1,015,290
1,000 Southeastern Public Service Authority, Virginia, Regional Solid
Waste
Refg Ser 1993 A (MBIA) ......................................... 4.70 07/01/04 1,022,210
- ----------- -------------
5,000 5,141,120
- ----------- -------------
Other Revenue (3.6%)
2,000 Pennsylvania Intergovernmental Cooperation Authority, Special
Tax Ser 1993 (FGIC) ............................................ 5.05 06/15/04 2,067,280
- ----------- -------------
49,465 TOTAL TAX-EXEMPT MUNICIPAL BONDS
- -----------
(Identified Cost $49,260,040) ....................................................... 50,786,532
-------------
SEE NOTES TO FINANCIAL STATEMENTS
38
<PAGE>
DEAN WITTER LIMITED TERM MUNICIPAL TRUST
PORTFOLIO OF INVESTMENTS March 31, 1998, continued
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- --------------------------------------------------------------------------------------------------------------
SHORT-TERM TAX-EXEMPT MUNICIPAL OBLIGATIONS (10.3%)
$2,200 East Baton Rouge Parish, Louisiana, Exxon Corp Ser 1989
(Demand 04/01/98) .............................................. 3.85*% 11/01/19 $2,200,000
700 Royal Oak Hospital Finance Authority, Michigan, William Beaumont
Hospital Ser 1996 J (Demand 04/01/98) .......................... 3.75* 01/01/03 700,000
2,000 Metropolitan Nashville Airport Authority, Tennessee, American
Airlines Inc Refg Ser 1995 A (Demand 04/01/98) ................. 3.75* 10/01/12 2,000,000
1,000 Salt Lake County, Utah, Service Station Holdings British
Petroleum
Ser 1994 B (Demand 04/01/98) ................................... 3.80* 08/01/07 1,000,000
- ----------- -------------
5,900 TOTAL SHORT-TERM TAX-EXEMPT MUNICIPAL OBLIGATIONS
(Identified Cost $5,900,000) ........................................................ 5,900,000
- ----------- -------------
$55,365 TOTAL INVESTMENTS
=========== (Identified Cost $55,160,040)(a) ......................................... 98.6% 56,686,532
CASH AND OTHER ASSETS IN EXCESS OF LIABILITIES ........................... 1.4 813,532
-------------
NET ASSETS ............................................................... 100.0% $57,500,064
========== =============
</TABLE>
- ------------
AMT Alternative Minimum Tax.
+ Joint exemption in Delaware and New Jersey.
++ Joint exemption in District of Columbia, Maryland and Virginia.
* Current coupon of variable rate demand obligation.
(a) The aggregate cost for federal income tax purposes approximates
identified cost. The aggregate gross and net unrealized
appreciation is $1,526,492.
Bond Insurance:
- ---------------
AMBAC AMBAC Indemnity Corporation.
FGIC Financial Guaranty Insurance Company.
MBIA Municipal Bond Investors Assurance Corporation.
SEE NOTES TO FINANCIAL STATEMENTS
39
<PAGE>
DEAN WITTER LIMITED TERM MUNICIPAL TRUST
PORTFOLIO OF INVESTMENTS March 31, 1998, continued
Geographic Summary of Investments
Based on Market Value as a Percent of Net Assets
March 31, 1998
<TABLE>
<CAPTION>
<S> <C>
Arizona 1.8%
California 5.1
Connecticut 3.6
Delaware 5.3
District of Columbia 3.6
Georgia 1.8
Hawaii 1.8
Illinois 3.6
Louisiana 3.8
Maryland 7.2
Massachusetts 7.2%
Michigan 3.0
Minnesota 3.6
Missouri 1.8
Montana 3.5
New Jersey 1.8
New York 5.4
Ohio 4.4
Pennsylvania 5.4
South Carolina 3.5
Tennessee 3.5%
Texas 7.1
Utah 3.5
Virginia 7.1
Wisconsin 9.1
Joint Exemptions * (8.9)
-------
Total 98.6%
=======
- ----------------
* Joint exemptions have been included in more than one geographic location.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
40
<PAGE>
DEAN WITTER LIMITED TERM MUNICIPAL TRUST
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
March 31, 1998
<TABLE>
<CAPTION>
<S> <C>
ASSETS:
Investments in securities, at value
(identified cost $55,160,040)....................................... $56,686,532
Cash................................................................. 143,542
Receivable for:
Interest........................................................... 652,509
Shares of beneficial interest sold................................. 156,900
Deferred organizational expenses..................................... 7,198
Prepaid expenses and other assets.................................... 22,699
-----------
TOTAL ASSETS....................................................... 57,669,380
-----------
LIABILITIES:
Payable for:
Shares of beneficial interest repurchased.......................... 51,084
Investment management fee.......................................... 25,259
Dividends to shareholders.......................................... 24,494
Accrued expenses .................................................... 68,479
-----------
TOTAL LIABILITIES.................................................. 169,316
-----------
NET ASSETS......................................................... $57,500,064
===========
COMPOSITION OF NET ASSETS:
Paid-in-capital...................................................... $64,762,920
Net unrealized appreciation.......................................... 1,526,492
Accumulated net realized loss........................................ (8,789,348)
-----------
NET ASSETS......................................................... $57,500,064
===========
NET ASSET VALUE PER SHARE,
5,605,489 shares outstanding (unlimited shares authorized of $.01
par value).......................................................... $ 10.26
===========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
41
<PAGE>
DEAN WITTER LIMITED TERM MUNICIPAL TRUST
FINANCIAL STATEMENTS, continued
STATEMENT OF OPERATIONS
For the year ended March 31, 1998
<TABLE>
<CAPTION>
<S> <C>
NET INVESTMENT INCOME:
INTEREST INCOME....................... $2,676,555
----------
EXPENSES
Investment management fee............. 281,962
Professional fees..................... 47,989
Registration fees..................... 35,244
Organizational expenses............... 33,259
Transfer agent fees and expenses ..... 27,776
Shareholder reports and notices ...... 17,449
Trustees' fees and expenses........... 13,430
Custodian fees........................ 3,360
Other................................. 8,282
----------
TOTAL EXPENSES...................... 468,751
Less: expense offset ................. (3,353)
----------
NET EXPENSES........................ 465,398
----------
NET INVESTMENT INCOME............... 2,211,157
----------
NET REALIZED AND UNREALIZED GAIN:
Net realized gain..................... 8,679
Net change in unrealized
depreciation......................... 1,901,212
----------
NET GAIN............................ 1,909,891
----------
NET INCREASE.......................... $4,121,048
==========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
42
<PAGE>
DEAN WITTER LIMITED TERM MUNICIPAL TRUST
FINANCIAL STATEMENTS, continued
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE YEAR
ENDED ENDED
MARCH 31, 1998 MARCH 31, 1997
- -----------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income ................................ $ 2,211,157 $ 2,643,153
Net realized gain (loss).............................. 8,679 (226,959)
Net change in unrealized depreciation................. 1,901,212 (32,266)
----------- ------------
NET INCREASE........................................ 4,121,048 2,383,928
Dividends from net investment income.................. (2,211,157) (2,659,597)
Net decrease from transactions in shares of
beneficial interest.................................. (5,507,667) (11,392,426)
----------- ------------
NET DECREASE........................................ (3,597,776) (11,668,095)
NET ASSETS:
Beginning of period................................... 61,097,840 72,765,935
----------- ------------
END OF PERIOD....................................... $57,500,064 $ 61,097,840
=========== ============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
43
<PAGE>
DEAN WITTER LIMITED TERM MUNICIPAL TRUST
NOTES TO FINANCIAL STATEMENTS March 31, 1998
1. ORGANIZATION AND ACCOUNTING POLICIES
Dean Witter Limited Term Municipal Trust (the "Fund") is registered under the
Investment Company Act of 1940, as amended, as a diversified, open-end
management investment company. The Fund's investment objective is to provide
a high level of current income which is exempt from federal income tax,
consistent with the preservation of capital and prescribed standards of
quality and maturity. The Fund seeks to achieve this objective by investing
primarily in intermediate term, investment grade municipal securities. The
Fund was organized as a Massachusetts business trust on February 25, 1993 and
commenced operations on July 12, 1993.
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts and disclosures. Actual results could differ
from those estimates.
The following is a summary of significant accounting policies:
A. VALUATION OF INVESTMENTS-- Portfolio securities are valued by an outside
independent pricing service approved by the Trustees. The pricing service has
informed the Fund that in valuing the portfolio securities, it uses both a
computerized matrix of tax-exempt securities and evaluations by its staff, in
each case based on information concerning market transactions and quotations
from dealers which reflect the bid side of the market each day. The portfolio
securities are thus valued by reference to a combination of transactions and
quotations for the same or other securities believed to be comparable in
quality, coupon, maturity, type of issue, call provisions, trading
characteristics and other features deemed to be relevant. Short-term debt
securities having a maturity date of more than sixty days at time of purchase
are valued on a mark-to-market basis until sixty days prior to maturity and
thereafter at amortized cost based on their value on the 61st day. Short-term
debt securities having a maturity date of sixty days or less at the time of
purchase are valued at amortized cost.
B. ACCOUNTING FOR INVESTMENTS-- Security transactions are accounted for on
the trade date (date the order to buy or sell is executed). Realized gains
and losses on security transactions are determined by the identified cost
method. Discounts are accreted and premiums are amortized over the life of
the respective securities. Interest income is accrued daily.
C. FEDERAL INCOME TAX STATUS-- It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute all of its taxable and nontaxable income to its
shareholders. Accordingly, no federal income tax provision is required.
44
<PAGE>
DEAN WITTER LIMITED TERM MUNICIPAL TRUST
NOTES TO FINANCIAL STATEMENTS March 31, 1998, continued
D. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS-- The Fund records dividends
and distributions to its shareholders on the record date. The amount of
dividends and distributions from net investment income and net realized
capital gains are determined in accordance with federal income tax
regulations which may differ from generally accepted accounting principles.
These "book/tax" differences are either considered temporary or permanent in
nature. To the extent these differences are permanent in nature, such amounts
are reclassified within the capital accounts based on their federal tax-basis
treatment; temporary differences do not require reclassification. Dividends
and distributions which exceed net investment income and net realized capital
gains for financial reporting purposes but not for tax purposes are reported
as dividends in excess of net investment income or distributions in excess of
net realized capital gains. To the extent they exceed net investment income
and net realized capital gains for tax purposes, they are reported as
distributions of paid-in-capital.
E. ORGANIZATIONAL EXPENSES-- Dean Witter InterCapital Inc. (the "Investment
Manager") paid the organizational expenses of the Fund in the amount of
$141,529 which were reimbursed exclusive of $12,651 which was absorbed by the
Investment Manager. Such expenses have been deferred and are being amortized
by the straight-line method over a period not to exceed five years from the
commencement of operations.
2. INVESTMENT MANAGEMENT AGREEMENT
Pursuant to an Investment Management Agreement, the Fund pays the Investment
Manager a management fee, accrued daily and payable monthly, by applying the
annual rate of 0.50% to the Fund's net assets determined as of the close of
each business day.
Under the terms of the Agreement, in addition to managing the Fund's
investments, the Investment Manager maintains certain of the Fund's books and
records and furnishes, at its own expense, office space, facilities,
equipment, clerical, bookkeeping and certain legal services and pays the
salaries of all personnel, including officers of the Fund who are employees
of the Investment Manager. The Investment Manager also bears the cost of
telephone services, heat, light, power and other utilities provided to the
Fund.
3. SECURITY TRANSACTIONS AND TRANSACTIONS WITH AFFILIATES
The proceeds from sales of portfolio securities, excluding short-term
investments, for the year ended March 31, 1998 aggregated $5,532,680.
45
<PAGE>
DEAN WITTER LIMITED TERM MUNICIPAL TRUST
NOTES TO FINANCIAL STATEMENTS March 31, 1998, continued
Morgan Stanley Dean Witter Trust FSB, an affiliate of the Investment Manager,
is the Fund's transfer agent. At March 31, 1998, the Fund had transfer agent
fees and expenses payable of approximately $600.
The Fund has an unfunded noncontributory defined benefit pension plan
covering all independent Trustees of the Fund who will have served as
independent Trustees for at least five years at the time of retirement.
Benefits under this plan are based on years of service and compensation
during the last five years of service. Aggregate pension costs for the year
ended March 31, 1998 included in Trustees' fees and expenses in the Statement
of Operations amounted to $5,871. At March 31, 1998, the Fund had an accrued
pension liability of $25,014 which is included in accrued expenses in the
Statement of Assets and Liabilities.
4. SHARES OF BENEFICIAL INTEREST
Transactions in shares of beneficial interest were as follows:
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE YEAR
ENDED ENDED
MARCH 31, 1998 MARCH 31, 1997
----------------------------- -----------------------------
SHARES AMOUNT SHARES AMOUNT
------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
Sold 2,295,609 $ 23,451,451 2,662,724 $ 26,485,209
Reinvestment of dividends 170,238 1,728,340 207,775 2,068,215
------------- -------------- ------------- --------------
2,465,847 25,179,791 2,870,499 28,553,424
Repurchased (3,025,601) (30,687,458) (4,015,739) (39,945,850)
------------- -------------- ------------- --------------
Net decrease (559,754) $ (5,507,667) (1,145,240) $(11,392,426)
============= ============== ============= ==============
</TABLE>
5. FEDERAL INCOME TAX STATUS
During the year ended March 31, 1998, the Fund utilized approximately $9,000
of its net capital loss carryover. At March 31, 1998, the Fund had a net
capital loss carryover of approximately $8,789,000 which may be used to
offset future capital gains to the extent provided by regulations, which is
available through March 31 of the following years:
<TABLE>
<CAPTION>
AMOUNT IN THOUSANDS
- -------------------------------------------------------------------------------
2003 2004 2005
---- ---- ----
<S> <C> <C>
$4,621 $3,941 $227
====== ====== ====
</TABLE>
46
<PAGE>
DEAN WITTER LIMITED TERM MUNICIPAL TRUST
FINANCIAL HIGHLIGHTS
Selected ratios and per share data for a share of beneficial interest
outstanding throughout each period:
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE YEAR ENDED MARCH 31, JULY 12, 1993*
---------------------------------------------------- THROUGH
1998 1997 1996 1995 MARCH 31, 1994
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period ..... $ 9.91 $ 9.95 $ 9.56 $ 9.61 $10.00
------ ------ ------ ------ ------
Net investment income..................... 0.40 0.40 0.41 0.42 0.29
Net realized and unrealized gain (loss) .. 0.35 (0.04) 0.39 (0.05) (0.39)
------ ------ ------ ------ ------
Total from investment operations.......... 0.75 0.36 0.80 0.37 (0.10)
Less dividends from net investment
income................................... (0.40) (0.40) (0.41) (0.42) (0.29)
------ ------ ------ ------ ------
Net asset value, end of period............ $10.26 $ 9.91 $ 9.95 $ 9.56 $ 9.61
====== ====== ====== ====== ======
TOTAL INVESTMENT RETURN+.................. 7.70% 3.65% 8.42% 4.01% (1.11)%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses.................................. 0.83% 0.88%(4) 0.87%(4) 0.76% 0.31 %(2)(3)
Net investment income..................... 3.92% 3.99% 4.09% 4.41% 3.92 %(2)(3)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands .. $57,500 $61,098 $72,766 $85,499 $170,589
Portfolio turnover rate................... -- -- -- 2% 6 %(1)
</TABLE>
- ------------
* Commencement of operations.
+ Calculated based on the net asset value as of the last business day of
the period.
(1) Not annualized.
(2) Annualized.
(3) If the Fund had borne all of its expenses that were assumed/reimbursed
or waived by the Investment Manager, the annualized expense and net
investment income ratios would have been 0.75% and 3.48%, respectively.
(4) Does not reflect the effect of expense offset of 0.01%.
SEE NOTES TO FINANCIAL STATEMENTS
47
<PAGE>
DEAN WITTER LIMITED TERM MUNICIPAL TRUST
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE SHAREHOLDERS AND TRUSTEES
OF DEAN WITTER LIMITED TERM MUNICIPAL TRUST
In our opinion, the accompanying statement of assets and liabilities,
including the portfolio of investments, and the related statements of
operations and of changes in net assets and the financial highlights present
fairly, in all material respects, the financial position of Dean Witter
Limited Term Municipal Trust (the "Fund") at March 31, 1998, the results of
its operations for the year then ended, the changes in its net assets for
each of the two years in the period then ended and the financial highlights
for each of the four years in the period then ended and for the period July
12, 1993 (commencement of operations) through March 31, 1994, in conformity
with generally accepted accounting principles. These financial statements and
financial highlights (hereafter referred to as "financial statements") are
the responsibility of the Fund's management; our responsibility is to express
an opinion on these financial statements based on our audits. We conducted
our audits of these financial statements in accordance with generally
accepted auditing standards which require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits, which included confirmation of securities at March
31, 1998 by correspondence with the custodian, provide a reasonable basis for
the opinion expressed above.
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York 10036
May 8, 1998
- -------------------------------------------------------------------------------
1998 FEDERAL TAX NOTICE (unaudited)
For the year ended March 31, 1998, all of the Fund's
dividends from net investment income were exempt interest
dividends, excludable from gross income for Federal income
tax purposes.
- -------------------------------------------------------------------------------
48
<PAGE>
APPENDIX
- -----------------------------------------------------------------------------
RATINGS OF INVESTMENTS
MOODY'S INVESTORS SERVICE INC. ("MOODY'S")
MUNICIPAL BOND RATINGS
<TABLE>
<CAPTION>
<S> <C>
Aaa Bonds which are rated Aaa are judged to be of the best quality. They carry the smallest degree of investment
risk and are generally referred to as "gilt edge." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various protective elements are likely to
change, such changes as can be visualized are most unlikely to impair the fundamentally strong position
of such issues.
Aa Bonds which are rated Aa are judged to be of high quality by all standards. Together with the Aaa group
they comprise what are generally known as high grade bonds. They are rated lower than the best bonds because
margins of protection may not be as large as in Aaa securities or fluctuation of protective elements may
be of greater amplitude or there may be other elements present which make the long-term risks appear somewhat
larger than in Aaa securities.
A Bonds which are rated A possess many favorable investment attributes and are to be considered as upper
medium grade obligations. Factors giving security to principal and interest are considered adequate, but
elements may be present which suggest a susceptibility to impairment sometime in the future.
Baa Bonds which are rated Baa are considered as medium grade obligation; i.e., they are neither highly protected
nor poorly secured. Interest payments and principal security appear adequate for the present but certain
protective elements may be lacking or may be characteristically unreliable over any great length of time.
Such bonds lack outstanding investment characteristics and in fact have speculative characteristics as
well.
Bonds rated Aaa, Aa, A and Baa are considered investment grade bonds.
Ba Bonds which are rated Ba are judged to have speculative elements; their future cannot be considered as
well assured. Often the protection of interest and principal payments may be very moderate, and therefore
not well safeguarded during both good and bad times over the future. Uncertainty of position characterizes
bonds in this class.
B Bonds which are rated B generally lack characteristics of the desirable investment. Assurance of interest
and principal payments or of maintenance of other terms of the contract over any long period of time may
be small.
Caa Bonds which are rated Caa are of poor standing. Such issues may be in default or there may be present elements
of danger with respect to principal or interest.
Ca Bonds which are rated Ca present obligations which are speculative in a high degree. Such issues are often
in default or have other marked shortcomings.
C Bonds which are rated C are the lowest rated class of bonds, and issues so rated can be regarded as having
extremely poor prospects of ever attaining any real investment standing.
</TABLE>
Conditional Rating: Bonds for which the security depends upon the
completion of some act of the fulfillment of some condition are rated
conditionally. These are bonds secured by (a) earnings of projects under
construction, (b) earnings of projects unseasoned in operation experience,
(c) rentals which begin when facilities are completed, or (d) payments to
which some other limiting condition attaches. Parenthetical rating denotes
probable credit stature upon completion of construction or elimination of
basis of condition.
Rating Refinements: Moody's may apply numerical modifiers, 1, 2 and 3 in
each generic rating classification from Aa through B in its municipal bond
rating system. The modifier 1 indicates a mid-range ranking; and a modifier 3
indicates that the issue ranks in the lower end of its generic rating
category.
49
<PAGE>
MUNICIPAL NOTE RATINGS
Moody's ratings for state and municipal notes and other short-term loans
are designated Moody's Investment Grade (MIG). MIG 1 denotes best quality and
means there is present strong protection from established cash flows,
superior liquidity support or demonstrated broad-based access to the market
for refinancing. MIG 2 denotes high quality and means that margins of
protection are ample although not as large as in MIG 1. MIG 3 denotes
favorable quality and means that all security elements are accounted for but
that the undeniable strength of the previous grades, MIG 1 and MIG 2, is
lacking. MIG 4 denotes adequate quality and means that the protection
commonly regarded as required of an investment security is present and that
while the notes are not distinctly or predominantly speculative, there is
specific risk.
VARIABLE RATE DEMAND OBLIGATIONS
A short-term rating, in addition to the Bond or MIG ratings, designated
VMIG may also be assigned to an issue having a demand feature. The assignment
of the VMIG symbol reflects such characteristics as payment upon periodic
demand rather than fixed maturity dates and payment relying on external
liquidity. The VMIG rating criteria are identical to the MIG criteria
discussed above.
COMMERCIAL PAPER RATINGS
Moody's Commercial Paper ratings are opinions of the ability to repay
punctually promissory obligations not having an original maturity in excess
of nine months. These ratings apply to Municipal commercial Paper as well as
taxable Commercial Paper. Moody's employs the following three designations,
all judged to be investment grade, to indicate the relative repayment
capacity of rated issuers: Prime-1, Prime-2, Prime-3.
Issuers rated Prime-1 have a superior capacity for repayment of short-term
promissory obligations. Issuers rated Prime-2 have a strong capacity for
repayment of short-term promissory obligations; and Issuers rated Prime-3
have an acceptable capacity for repayment of short-term promissory
obligations. Issuers rated Not Prime do not fall within any of the Prime
rating categories.
STANDARD & POOR'S CORPORATION ("STANDARD & POOR'S")
MUNICIPAL BOND RATINGS
A Standard & Poor's municipal rating is a current assessment of the
creditworthiness of an obligor with respect to a specific obligation. This
assessment may take into consideration obligors such as guarantors, insurers,
or lessees.
The ratings are based on current information furnished by the issuer or
obtained by Standard & Poor's from other sources it considers reliable. The
ratings are based, in varying degrees, on the following considerations: (1)
likelihood of default-capacity and willingness of the obligor as to the
timely payment of interest and repayment of principal in accordance with the
terms of the obligation; (2) nature of and provisions of the obligation; and
(3) protection afforded by, and relative position of, the obligation in the
event of bankruptcy, reorganization or other arrangement under the laws of
bankruptcy and other laws affecting creditors' rights.
Standard & Poor's does not perform an audit in connection with any rating
and may, on occasion, rely on unaudited financial information. The ratings
may be changed, suspended or withdrawn as a result of changes in, or
unavailability of, such information, or for other reasons.
<TABLE>
<CAPTION>
<S> <C>
AAA Debt rated "AAA" has the highest rating assigned by Standard & Poor's. Capacity to pay interest and repay
principal is extremely strong.
AA Debt rated "AA" has a very strong capacity to pay interest and repay principal and differs from the highest-rated
issues only in small degree.
50
<PAGE>
A Debt rated "A" has a strong capacity to pay interest and repay principal although they are somewhat more susceptible
to the adverse effects of changes in circumstances and economic conditions than debt in higher-rated categories.
BBB Debt rated "BBB" is regarded as having an adequate capacity to pay interest and repay principal. Whereas it
normally exhibits adequate protection parameters, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity to pay interest and repay principal for debt in this category than
for debt in higher-rated categories.
Bonds rated AAA, AA, A and BBB are considered investment grade bonds.
BB Debt rated "BB" has less near-term vulnerability to default than other speculative grade debt. However, it
faces major ongoing uncertainties or exposure to adverse business, financial or economic conditions which
could lead to inadequate capacity to meet timely interest and principal payment.
B Debt rated "B" has a greater vulnerability to default but presently has the capacity to meet interest payments
and principal repayments. Adverse business, financial or economic conditions would likely impair capacity
or willingness to pay interest and repay principal.
CCC Debt rated "CCC" has a current identifiable vulnerability to default, and is dependent upon favorable business,
financial and economic conditions to meet timely payments of interest and repayments of principal. In the
event of adverse business, financial or economic conditions, it is not likely to have the capacity to pay
interest and repay principal.
CC The rating "CC" is typically applied to debt subordinated to senior debt which is assigned an actual or implied
"CCC" rating.
C The rating "C" is typically applied to debt subordinated to senior debt which is assigned an actual or implied
"CCC" debt rating.
Cl The rating "Cl" is reserved for income bonds on which no interest is being paid.
D Debt rated "D" is in payment default. The 'D' rating category is used when interest payments or principal
payments are not made on the date due even if the applicable grace period has not expired, unless S&P believes
that such payments will be made during such grace period. The 'D' rating also will be used upon the filing
of a bankruptcy petition if debt service payments are jeopardized.
NR Indicates that no rating has been requested, that there is insufficient information on which to base a rating
or that Standard & Poor's does not rate a particular type of obligation as a matter of policy.
Bonds rated "BB", "B", "CCC", "CC" and "C" are regarded as having predominantly speculative characteristics
with respect to capacity to pay interest and repay principal. "BB" indicates the least degree of speculation
and "C" the highest degree of speculation. While such debt will likely have some quality and protective characteristics,
these are outweighed by large uncertainties or major risk exposures to adverse conditions.
Plus (+) or minus (-): The ratings from "AA" to "CCC" may be modified by the addition of a plus or minus sign
to show relative standing within the major ratings categories.
The foregoing ratings are sometimes followed by a "p" which indicates that the rating is provisional. A provisional
rating assumes the successful completion of the project being financed by the bonds being rated and indicates
that payment of debt service requirements is largely or entirely dependent upon the successful and timely
completion of the project. This rating, however, while addressing credit quality subsequent to completion
of the project, makes no comment on the likelihood or risk of default upon failure of such completion.
</TABLE>
51
<PAGE>
MUNICIPAL NOTE RATINGS
Commencing on July 27, 1984, Standard & Poor's instituted a new rating
category with respect to certain municipal note issues with a maturity of
less than three years. The new note ratings denote the following:
SP-1 denotes a very strong or strong capacity to pay principal and
interest. Issues determined to possess overwhelming safety
characteristics are given a plus (+) designation (SP-1+).
SP-2 denotes a satisfactory capacity to pay principal and interest.
SP-3 denotes a speculative capacity to pay principal and interest.
COMMERCIAL PAPER RATINGS
Standard and Poor's commerical paper rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no more
than 365 days. The commercial paper rating is not a recommendation to
purchase or sell a security. The ratings are based upon current information
furnished by the issuer or obtained by S&P from other sources it considers
reliable. The ratings may be changed, suspended, or withdrawn as a result of
changes in or unavailability of such information. Ratings are graded into
group categories, ranging from "A" for the highest quality obligations to "D"
for the lowest. Ratings are applicable to both taxable and tax-exempt
commercial paper. The categories are as follows:
Issues assigned A ratings are regarded as having the greatest capacity for
timely payment. Issues in this category are further refined with the
designation 1, 2 and 3 to indicate the relative degree of safety.
A-1 indicates that the degree of safety regarding timely payments is very
strong.
A-2 indicates capacity for timely payment on issues with this designation is
strong. However, the relative degree of safety is not as overwhelming as
for issues designated "A-1".
A-3 indicates a satisfactory capacity for timely payment. Obligations
carrying this designation are, however, somewhat more vulnerable to the
adverse effects of changes in circumstances than obligations carrying the
higher designations.
52
